How to Pay Off Your Mortgage Faster Without Overstretching

Start With Your Loan Balance and Cash Flow

A home loan is made up of the principal loan amount and the interest charged by the lender. The principal loan is the money borrowed, while interest is the cost of borrowing that money across the loan term. In the early years, much of a monthly mortgage payment may go towards interest rather than reducing the loan principal. That is why even small additional repayments may reduce interest over time, depending on the loan balance, interest rate, repayment amount, fees and loan terms.

Use Extra Repayments Without Overcommitting

Extra repayments are payments made above the minimum repayment required by the lender. They may reduce the home loan balance faster when accepted by the lender and left in the loan, which may contribute to paying less interest over time, depending on the interest rate, fees, loan terms and how the borrower uses the loan. Some borrowers make regular repayment increases, while others use a lump sum when money becomes available. This might include a bonus, tax refund, inheritance or other extra cash.

Check The Rules Before Paying More

Some loans allow unlimited extra repayments, while others limit extra payments. Fixed rate home loans and some fixed loan products may have restrictions or fees if a borrower pays too much extra or ends the fixed rate early. Variable rate loans and variable rate home loans often provide more flexibility, but this is not automatic. It may be useful to check the lender’s fees, redraw facility rules, offset access and repayment conditions before making changes.

Consider Fortnightly Payments and More Frequent Repayments

Fortnightly payments may help some borrowers reduce their loan sooner if the repayment is set at half the monthly repayment, paid every two weeks, and treated that way by the lender. Because there are 26 fortnights in a year, this may create the effect of one extra monthly repayment each year, depending on how the lender sets and calculates the repayments. More frequent repayments may also suit borrowers who are paid weekly or fortnightly. The main point is to check how the lender calculates the repayment, because not every repayment schedule works the same way.

Use An Offset Account to Reduce Interest While Keeping Access to Money

An offset account is a savings or transaction account linked to a home loan. The offset account balance may reduce the loan balance used to calculate interest, which may reduce interest costs while still allowing access to the money, depending on the loan terms, offset rules and fees. For example, salary and savings may sit in a transaction account or offset account rather than a separate bank account. The loan principal does not reduce in the same way as an extra repayment, but the interest charged may be lower while the money stays in the account.

Offset And Redraw Are Different Features

A redraw facility may let a borrower access extra repayments already made into the loan, subject to lender rules. It is different from a transaction account linked to the loan, and access may depend on timing, minimum redraw amounts, fees and loan conditions. Redraw may have tax consequences if a property is or later becomes an investment property, particularly where borrowed funds are used for both private and income-producing purposes. The deductibility of interest depends on how the borrowed money is used, and mixed-purpose borrowing may need to be apportioned. Borrowers may wish to seek advice from a registered tax agent before making tax-sensitive decisions involving a redraw facility. This article does not provide tax advice.

Review Whether Your Current Loan Still Fits

A current loan that suited a borrower years ago may not remain the right fit. The interest rate, loan features, fees, loan amount, income, expenses and lender policies may all change. A review may show whether the current lender or other lenders have options with different rates, fees, features or repayment structures that may be compared. Refinancing is not guaranteed and remains subject to lender assessment, credit criteria, serviceability and other lending requirements.

Keep The Goal Practical and Sustainable

For many Australians, owning their own home is part of the great Australian dream, but the mortgage may also feel like the biggest debt they will ever face. Paying off a mortgage faster may be appealing, but many borrowers prefer a plan that still leaves room for normal life and day-to-day expenses. A mortgage free life may be a long-term goal, but borrowers do not need to chase it by overstretching. Extra repayments, lump sum payments, fortnightly repayments, offset accounts and loan reviews may all help in different ways, depending on the loan and the borrower’s financial situation.

Eurobodalla Finance provides general information to help readers review home loan features, compare broad options and understand common loan structures. This article is general information only and does not take into account your objectives, financial situation or needs. It is not personal advice and is not legal, tax or financial advice. It is not a recommendation or statement that any loan, feature or strategy is suitable for you. Eligibility for loan products, refinancing or lender policies will depend on the lender’s criteria and your circumstances. Tax outcomes may vary, and borrowers should seek advice from a registered tax agent for tax matters.