How to payoff your mortgage faster
When you finally find the perfect house, sign the contract and unpack the last box you can start to feel as though you have fulfilled the great Australian dream of owning your own home. That is until, month after month, you make mortgage repayments, and those repayments stretch out in front of you for the next 30 years. With such a daunting long term prospect it can seem impossible to pay off your mortgage faster and truly own your home, especially with rising interest rates.
However, there are a few simple ways you can pay off your mortgage faster, even if you can’t afford to commit more to your monthly repayments. Simply by switching to a different mortgage product you can have access to interest rates and features which were not available when you chose your first home loan.
- Look for a lower interest rate
- Add an offset account
- Add value to your home
If your mortgage has a standard variable interest rate then it moves quite closely in line with the Reserve Bank of Australia’s decisions on official interest rates, which have been on the rise recently. At the same time, a fixed interest rate can protect you during the fixed term, but at the end of that term your loan attracts the standard variable rate which could be several percentage points higher than the fixed rate you have been paying.
Therefore, look at where interest rates are in their cycle and where they are predicted to go, to help you calculate whether you will be better off switching your interest rate. In a climate where rates have already begun to rise, a short to medium term fixed rate can be beneficial to protect you further, or a capped interest rate which can move down with rate cuts, but will move up only to the capped maximum.
Switching to a home loan with a linked 100% offset account can help you reduce the amount of interest in your monthly repayments and allow you to pay more towards your principal, paying off your mortgage sooner. An offset account works as a transaction, cheque and savings account in one and works best when you have all of your available funds in the account, for as long as possible. The balance of the offset account is offset against your loan amount so you only pay interest on your loan amount, less the balance of your offset account.
In this way you use your savings to reduce your debt and pay off your mortgage faster, and an offset account is perfect for those with savings and transaction funds they can keep in their account. You can also be better off using your savings to reduce interest father than earn interest because you are not taxed on the interest you save using an offset account, but you will lose some of your returns from a savings account when you have to declare interest earned.
If you are able to make simple extensions or additions to your home, you can be increasing your property’s value. As a result, the loan amount represents a smaller percentage of the value of the property and you have a lower loan to value ratio. This means you may be able to refinance to a mortgage where your principal represents a smaller percentage of the value of your home, and as a result you will not have to continue to pay lender’s mortgage insurance, and can be eligible for a lower interest rate as you are a lower risk.
Before you decide on a home loan refinancing option to help you pay off your mortgage faster, your choice will depend on your particular circumstances. For example, if you do not have any savings then you will not be able to benefit from an offset account as offset accounts work best with significant balances. At the same time, if you can’t afford to renovate or extend your home, borrowing or going further into debt will see minimal benefit from this option.
At the same time, if you have been repaying your mortgage for some time, you have probably build equity in your property naturally, through capital growth and you may consider looking to refinance your home to conduct renovations or consolidate debts ‚ improving your lifestyle and freeing up extra cash.
To decide whether refinancing is a viable option you will need to look at all of the application fees and charges associated with discharging your old home loan and applying for one which is a better fit. Make sure that the savings you will make from your new loan product will outweigh these costs within the first 12 to 18 months of refinancing. To help you avoid some of these refinancing costs, contact your current home loan provider first as they may be able to apply a lower interest rate or add loan features to your current product, to save you potentially thousands of dollars to switch your loan completely.
For more help and advice on the new loan products and features available, and whether you can benefit from the switch, contact Personal Loan Finder now.
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- Refinancing: How does it work?