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How to pay off your mortgage sooner and save thousands

It’s a simple equation. Paying down your mortgage sooner can save you thousands of dollars in interest in the long run. Here are some ways to make the most of every dollar while paying off your loan quicker.

Keep an eye on your options

Often the biggest home loan savings come from shopping around, finding the lowest rate available, and negotiating with lenders.

Depending on market conditions, refinancing your mortgage could reduce your interest rate. Having an annual ‘mortgage health check’ with your broker is a good way to know if your current mortgage is still right for you, or if there are alternative options available.

Balance your budget 

This sounds like a no-brainer, but reassessing your finances and seeing where you’re spending money that could otherwise go into repaying your mortgage can make a big difference. 

Do you need to be subscribed to three different streaming services when one would do? It might be that you're just spending more because you've lost visibility on your outgoings.

Whatever the case, we can all benefit from keeping a closer eye on where the money goes and finding ways to direct a little more of it into paying off that loan.

Use a redraw or offset account

If you want to make extra repayments, but keep your savings available to use when you need, there are two options available.  

Redraw is available on most variable rate loans, and if you make extra repayments but need some extra money - let’s say to cover the cost of car repairs - you can ‘redraw,’ or withdraw, those extra repayments to use*. 

Offset accounts allow you to accrue savings you can access at any time. But the big difference between this and a standard savings account lies in the fact that the balance of this type of account is “offset” each day against the value of your loan. And when your lender calculates your repayments, the amount in your offset account is taken off the principal or balance owing - meaning you pay less in interest.

For example, if you owe $300,000 on your loan and have $50,000 in your offset account, interest is only calculated on $250,000 of that balance. 

Increase your repayments...

Let’s take a look at repaying a $500,000 home loan, using the mortgage calculator available on the Australian Government's MoneySmart website

If such a loan was taken at a fixed rate of 5% and paid back at $2700 a month along with $10 in monthly fees, it would take one month shy of the Australian average of 30 years to pay off. And almost half of your repayments would be in interest, not in paying back the principal.  

But if you increased those monthly repayments to $2900 - around $50 extra a week - you’d pay that same loan off in 25 years and 7 months, and save almost $80,000 in interest in the process.

Throw in a little extra when you can

Been given a financial gift? Got a little more back than you expected in your tax return? When life throws you a windfall, it can seem like an opportunity to treat yourself. But it can also be a good time to put a little extra back into the mortgage.

Likewise, if you receive a raise at work or your partner goes back into the workforce after a break, this could also be an opportunity to pay off some more of the mortgage. If you’ve managed without that income so far, it could pay to send it straight to your loan repayments.

The key is making a plan, and sticking with it. A professional mortgage broker will work with you to understand your situation, determine the options available, and help you find the best solution.

*Check the conditions of your loan before you decide to redraw.

This article provides general information only and may not reflect the publisher’s opinion. None of the authors, the publisher or their employees are liable for any inaccuracies, errors or omissions in the publication or any change to information in the publication. This publication or any part of it may be reproduced only with the publisher’s prior permission. It was prepared without taking into account your objectives, financial situation or needs. Please consult your financial adviser, broker or accountant before acting on information in this publication.



 

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