How to reduce home loan debt

Mortgage debt can be a risk for many Australians and their financial security. When property prices are high, homebuyers may need to take out large home loans to afford to buy in popular areas. This can leave household budgets vulnerable to mortgage stress if circumstances change, such as if the borrower lost their job or had to cover unexpected expenses, or if interest rates rose.

Finding ways to lower your outstanding mortgage debt could potentially help to lower your risk of financial stress, and even make more options available for managing your personal finances.

What are the benefits of reducing mortgage debt? 

• Save on interest charges: The faster you can lower your mortgage principal, the less interest you may pay over the long term.
• Grow your equity: Your equity is the current value of your property, minus the remaining mortgage debt. The more of your home loan principal you can repay, the more your equity can increase. You can use your equity to access more financial options, such as refinancing your home loan or accessing a line of credit.

How can I reduce my home loan debt?

Keep up with your home loan’s principal and interest repayments

It’s not exciting, but making regular principal and interest mortgage repayments should slowly but surely reduce the amount owing on your home loan principal over time.

While you may have the options to switch to interest-only repayments and give your household budget some short-term relief, this could cost you more interest on your property over the long term, as your loan will take longer to pay off.

Make extra repayments

If you can afford it, putting more money towards your mortgage can help to reduce the outstanding principal more quickly. This can bring you that little bit closer to exiting your loan early and paying less in total interest on your home loan.

You could make regular extra repayments, or pay the occasional lump sum when you have extra money available, such as if you receive an inheritance or a tax refund.  

You could also consider switching from monthly to fortnightly repayments, as by paying half the monthly amount every two weeks, you’ll effectively make 13 monthly repayments over a 12-month period.

But before you put your spare savings onto your home loan as extra repayments, remember that you may not be able to easily access this money again if you need it in a hurry. Your lender may offer a redraw facility that lets you take extra repayments back out from your home loan, though there may be limits, fees, and other terms and conditions involved.

Keep making the same repayments if your interest rate drops

If your bank or mortgage lender cuts the variable interest rate on your home loan, you may be offered the option to lower your home loan repayments, giving your household budget some relief.

However, if you instead choose to keep making the same higher repayments, the extra will go toward reducing your home loan principal, helping to pay off your home loan faster and save you money in long-term interest charges.    

Refinance onto a lower rate, but keep making the same repayments

If it looks like your mortgage lender is unlikely to slash its variable rates any time soon, you may be able to take matters into your own hands by refinancing your loan with another lender. Keep in mind when doing so that in order to reduce your mortgage debt faster, you may need to choose a new loan term that’s the same or shorter than your previous mortgage, and keep making higher repayments even though the interest rate is lower.

If you’d prefer not to jump ship to a new lender, you may be able to negotiate a rate cut with your existing one. You may be surprised by what a bank may offer to keep you as a customer when you call them and ask to be put on a lower rate (such as the discounted rate that many banks offer new customers).

Use an offset account

An offset account is a regular bank account that’s linked to your home loan. Any money in this account is used to “offset” your mortgage principal, so you can be charged less interest. For example, if you had a $400,000 home loan and $20,000 in your offset account, you’ll be charged interest as if you only had a $380,000 mortgage.

By using your offset account to lower your interest charges, you may be able to put more money towards your mortgage principal, further reducing your home loan debts and further shrinking your long term interest costs.

However, keep in mind that home loans with extra features and benefits (including offset accounts) often charge higher interest rates and fees than more basic “no-frills” home loans. If you’re unlikely to hold a high enough balance in your offset account to significantly reduce your interest charges, your mortgage could end up costing more than you’d like.

Get help if you need it

A mortgage broker may be able to offer personal advice on financial strategies to help you reduce your home loan debt and manage your financial situation.

If you’re really struggling with your mortgage debt, you could also consider contacting a financial counsellor.

Compare home loans in Australia