Most mortgage holders want to do whatever they can to pay off their mortgage earlier, but don’t know where to start.
Paying your mortgage off faster doesn’t mean living on 2-minute noodles or going without. Making minor adjustments to your mortgage can make a big difference over time and can save you thousands of dollars.
If you repay your mortgage off faster, this will reduce the overall interest that you pay.
So, what can you do to repay your mortgage faster?
Increase your loan repayments (without triggering the early repayment penalty threshold)
When you have a mortgage, you’re required to pay a minimum amount which is determined by your loan term and current interest rate. But what a lot of people don’t know, is that you can opt to pay more. Banks allow you to increase your loan repayments within a threshold without incurring an ‘Early Repayment Fee’. For example, ASB allow you to increase your fixed interest rate loan repayments by up to $500 per fortnight or $1,000 per month.
For example. If you have a $500,000 mortgage at 5.00% p.a. and a 25-year loan term. Your required repayment is $2,923 per month. Over the loan term, you’ll pay $376,885 in interest costs. However, paying an extra $1,000 per month for the remaining mortgage term could mean you’d save around $162,900 on interest costs. These results assume the interest rate stays at 5.00% over the whole remaining mortgage term.
Regularly paying a bit more (even if it’s just a small amount like $20 extra per week) can make a difference on the lifetime of your loan. The faster you pay your principal down, the more interest you’ll save.
Pay fortnightly instead of monthly
If your loan repayments are monthly, change them to fortnightly repayments, and this will help you save.
When you make monthly repayments, you make 12 payments a year, but when you pay fortnightly, you make 26 payments per year, which turns out to 13 payments in a year. With the extra loan repayment, you reduce your balance by several thousands of dollars in interest over the lifetime of your mortgage.
Pay your loan repayment on settlement day
Normally when your new mortgage is drawn down, you’re not required to make any loan repayments until 2 weeks or one month after drawdown (depending on what loan repayment frequency you have opted for). However, if you make a loan repayment straight away on the settlement date, you reduce the principal immediately, which means starting your mortgage offer with less interest accrued. For example, if your first repayment is $2,000, not paying interest on that amount for 25 years will add up to over $1,000, so it’s a great saving to make on day one.
Keep your loan repayments the same even if interest rates drop
If your mortgage is on a floating interest rate, and interest rates drop, your loan repayments will also automatically drop. Consider keeping your loan repayment amount the same to repay back your mortgage faster.
Or if your mortgage expires off its current fixed term and interest rates are lower, consider keeping your loan repayments the same when refixing at a lower interest rate.
Keeping your loan repayments the same will help you out in the long term, especially when interest rates increase again.
Divert any increases in pay & bonuses to your mortgage
Structuring your mortgage so that you can focus on paying a smaller amount faster
By structuring your mortgage so that you have a small portion on its own loan terms where you can pay this off as quickly as you can over a couple of years will make it a lot more achievable to repay your mortgage faster.
And once that small portion is repaid, to break off another small portion and focus on repaying that amount over a couple of years and so on.
Regularly review your budget to cut costs and pay your mortgage down instead
It’s not fun to think about sacrificing and going without, but if it can save you thousands of dollars in interest costs on your mortgage, there is great benefit in doing this.
Regularly review your budget and cut costs where you can and diverting these costs to your mortgage will help repay your mortgage faster.
Consider refinancing to a different bank
A key difference between the two forms of ownership is that, upon a co-owner passing away, a joint tenancy interest will automatically go to the surviving owner, but a tenancy in common share will become part of the deceased’s estate and be distributed in accordance with their will.
Don’t add loan fees to your mortgage
It’s very easy to have your loan fees added on to your mortgage, but this costs you in the long run. While it’s easier to avoid paying any mortgage fees upfront, but those fees will cost you a lot more than you realise because they will accrue interest from day one.
