Four options to pay off your home loan sooner

Many mortgage holders want to save money on interest payments and slash years off their mortgage terms. Fortunately, there are many home loans offering flexible features that could help you to pay off your property faster.

Extra repayments

Every principal and interest repayment you make towards your mortgage brings you one step closer to paying off your loan in full. Of course, sticking to the minimum required repayments often means it will be decades before your mortgage is fully paid off. 

Many lenders offer the option of paying extra money onto your mortgage, directly lowering the outstanding principal. This in turn can lower the interest you’re charged with each repayment. While you could use this to lower your monthly repayments and save some money in your household budget, you could also choose to keep making the same repayment amount, putting the extra towards paying even more off your remaining principal. 

You may choose to make regular extra repayments, such as adding an extra $50 or $100 each time – every little bit helps, right? Alternatively, you could pay a lump sum onto your mortgage when you can afford it, such as if you get a tax refund or an inheritance. 

If you’re concerned about locking up too much of your spare savings in your mortgage, consider checking if your home loan offers a redraw facility. This feature allows borrowers to take extra repayments back out of their home loan when they need it, such as when they need to pay for unexpected last-minute expenses. Keep in mind that some lenders limit how much money you can redraw, how often you can make redraws, or charge redraw fees for using the feature.

Offset account

An offset account is a bank account that is linked to your home loan. Any money you deposit into this account is used to “offset” your mortgage principal when calculating your interest charges, allowing you to save money. 

For example, if you had a $500,000 home loan, and had $50,000 saved in your offset account, you’d be charged interest as if you only had a $450,000 mortgage. Much like when making extra repayments, these interest savings could potentially let you enjoy lower monthly repayments, or you could keep making the same repayments and put the extra towards lowering your mortgage principal, bringing you closer to paying off the property. 

Money in an offset account can be deposited, transferred or withdrawn just like any other bank account, making an offset account generally more flexible than using a redraw facility to access extra mortgage repayments. 

It’s important to remember that home loans with offset accounts may have higher interest rates than a more basic “no-frills” mortgage offer. If you’re not confident that you’ll be able to keep sufficient funds deposited in your offset account for the interest savings to make up for these higher rates, it could be worth reconsidering whether an offset account may be worth it for you. 

Increase your repayment frequency

You don’t have to make mortgage repayments every month – you may also have the option to switch to fortnightly or even weekly repayments if you prefer. This could potentially allow you to pay off your property a little bit sooner, depending on how your mortgage lender calculates your repayments and charges interest.

Because one year is made up of 26 fortnights, switching to fortnightly repayments means that you’ll be effectively making the equivalent of 13 monthly repayments over the course of one 12 month year. Over a home loan’s decades-long term, this can add up - calculate the repayments to see by how much! 

Also, many lenders calculate interest on your home loan daily. The more frequently you can make repayments that reduce your mortgage principal, the more you may be able to save in interest charges over the long term. 

Refinance

Once you’ve built up some equity in your property, you may be in a position to refinance your home loan with another lender, who may charge a lower interest rate. This could let you enjoy lower repayments and relieve some pressure on your budget. 

But if you can afford to keep making your original repayments while being charged a lower interest rate, more of each repayment can go towards your mortgage principal. This can help you to quickly shave years off your mortgage and save more on interest over time. 

Keep in mind that refinancing may not always be a valid option for every borrower. There may be fees and charges to pay from your new and old lenders, and you’ll need to fulfil the new lender’s eligibly criteria, such as holding sufficient equity in your property. If you’re not sure whether refinancing may be right for you, consider contacting a mortgage broker.

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