30 Jul Article: How to Pay Off Your Mortgage Faster
Your home is likely the biggest financial asset you every purchase, with your mortgage the biggest financial liability you ever have. Paying off a mortgage is a great financial achievement and this is how you can pay off your mortgage sooner.
Reduce your expenses freeing up cashflow.
This could be done in many ways from reducing insurance costs, saving on bills or reducing how much you spend on luxury items such as restaurants and alcohol.
Setup higher regular payments.
Rarely will anything you do have as much benefit as making higher repayments. This is because 100% of the repayments made above the minimum are used to pay down the principal. Start off small and work your way up. As an added bonus, this is a great way to build up emergency savings in a financially efficient way.
Try and make lump sum payments early.
Due to the nature of compounding, interest money contributed at the beginning of your mortgage will have a much larger effect on contributions made towards the end of your mortgage.
Pay off your loan as fast as you can.
Ok, so that is what this list is about, right? So why put it in here? Because the faster you pay off your loan, the easier it is to pay off your loan quickly. Let me explain. If you take out a loan of $400,000 at 5% for 25 years you will pay $701,508 over the term of your loan. If you pay the loan out over 10 years, rather than 25, you will pay $509,114 over the term of the loan. That is a saving of $192,394.
Make your repayments as frequent as possible.
Your loan interest is charged monthly but calculated daily, so the less you owe each day the less interest is charged. Therefore, if you are paid weekly or fortnightly, you can pay off your loan faster simply by making weekly or fortnightly repayments.
Avoid interest-only mortgages.
Interest-only loans can be used as a way of freeing up cash flow to pay for things like home improvements and furniture in the first years of purchasing a property. The cost of doing this is high because interest-only mortgages come with a higher interest rate than property and interest mortgages. Additionally, once your interest-only period has finished, your repayments will jump up much higher if you were making principal and interest repayments from the start, making it harder to make extra repayments.
Regularly review your mortgage.
In such a competitive market, banks are always fighting to obtain and retain customers. It is ideal to keep an eye on the interest rate you are paying vs the market rate, what fees you are paying, and what is included in your loan such as offset accounts, fee free transaction accounts, and credit cards. Also, don’t be afraid of lenders without branches offering lower rates as they can still be reputable and of high quality.
Consolidate your debts.
If you have enough capital in your property, it may be beneficial to consolidate your debts. This is because mortgages traditionally have the lowest interest rates of all forms of debt, but make sure you use your freed up cash flow to make extra repayments to your mortgage otherwise you may be worse off with a longer loan term.
When refinancing, retain the same loan term.
It is common for people to look at refinancing their mortgage every 2+ years to make sure they are getting the best deal. A mistake often made is to extend the loan term back out to the full 30 years each time which will reduce your repayments and free up cash flow with no extra repayments made. This can leave you worse off than when you started.
Talk to a financial adviser about debt recycling strategies.
A debt recycling strategy involves borrowing more money against your property for investment purposes. The objective is to seek out investment returns higher than the cost of borrowing in a tax effective manner. Anytime money is borrowed for investment purposes it is called gearing and after inappropriate gearing strategies during the global financial crisis, many people have been wearing of gearing. Gearing does have its risks and needs to be managed with caution but under the right circumstances, with the right planning and advice, it can be the most beneficial long term strategy to paying off your mortgage faster and more effectively.
This post contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information
Wong, D. (2018). How to pay off your mortgage faster. [online] Canvas3.ytml.com.au. Available at: https://canvas3.ytml.com.au/sites/e54abd20-1cee-42cd-9b3a-7f2f214f2005/preview/resource-centre/articles/how-to-pay-off-your-mortgage-faster [Accessed 24 Jul. 2019].