How to pay off your mortgage faster
For most people, their home loan is their biggest debt and for that reason, there is a strong urge to pay it off faster.
A lot of homeowners want to reduce mortgage payments by a getting lower home loan interest rate. Some want to pay off their loans faster to own their home quicker, while others are looking to minimise their monthly payments. The good news is reducing your home loan payments is possible, in fact, there’s more than one way to go about it.
Not a lot of people are well-versed in the ins and outs of reducing home loan interest. If you catch yourself wondering ‘how can I lower my interest on my mortgage?’, you’re in luck because in this article we show you the different ways you can do just that.
What you should do before getting a home loan
The best way to pay less interest on your loan is by getting a low rate on your home loan in the first place. If you’re still in the early part of your home loan journey, make sure to take these tips into consideration.
Put down a big down payment or deposit
Pay off as much as you can as early as possible. Most lenders accept a home deposit of at least 20% of the property value with some lenders accepting as little as 10%. If you can afford to, consider increasing the amount you are paying as a deposit on your home to help you in the long run.
Paying more upfront means borrowing less. Lenders see borrowers with a smaller loan-to-value ratio (LVR) as less of a risk. Many lenders will offer lower interest rates for customers with an LVR below 70% or 80% (those with 20% or 30% deposit), compared to borrowers who have an LVR above 80%.
Plus, if you pay 20% or more on your home deposit, you can avoid paying Lenders Mortgage Insurance. By making a substantial deposit, you’ll have the advantage of saving on extra costs and paying less interest over time.
Avoid interest-only loans
For interest-only loans, your monthly repayments only cover the interest on your borrowed amount (also known as the principal). For the beginning of the loan term for a set period of time (generally, one to five years), you’ll only be paying the interest on your loan. After the interest only period expires, your loan will revert to a principal-and-interest or P&I home loan. It is at time this that you’ll be required to pay for both the principal plus interest.
A lot of borrowers are drawn to the interest-only loans, particularly for their investment properties, because the repayment amount is lower during the first few years. However, in an interest-only loan, the repayment amounts are only covering the interest owed on the principal amount. This means you’ll still have to pay off the principal amount eventually.
If you want to pay your mortgage off faster, it’s best to avoid interest-only loans. While repayments will be less during the interest-only period, the monthly or fortnightly loan repayments will eventually go up when your loan reverts to principal and interest repayments, as you will be required to pay back the principal balance of your loan over a shorter period of time.
Choose a short loan term
Your loan term can affect how much interest you will pay over the life of your loan. Taking out a shorter term on your loan, for example 15 to 20 years rather than the standard 30 years, can help you pay less interest on your loan as you’re paying back the loan over a shorter period of time.
The main drawback to a shorter loan term is higher monthly payments. But shorter loan terms do, typically, help you save more money in the long run because you’re paying interest on your loan amount for a smaller period of time. Look at your financial situation and see whether a shorter loan term is a good fit for you.
Know what you can afford
Be wary about taking a loan that might be too big for your budget. Use our handy borrowing calculator to estimate how much you can realistically borrow based on your situation.
Not taking on a loan that is too big and will help you avoid financial difficulty in the future, and will allow you to easily manage your repayments to ensure you pay off your loan quickly.
Bulk up your loan payments
If you already have a mortgage, you can work on reducing home loan interest through the following methods:
Make extra or lump sum payments
You can significantly reduce the overall interest charged on your mortgage by making extra or lump sum payments towards your principal amount. The additional payment you make helps reduce the interest you pay on your loan. And the additional payment can lessen your loan by years.
There are two ways you can make extra or lump sum payments. First is adding payments to your variable loans.com.au loan where you send your funds to your loan redraw facility or offset sub-account. This reduces the interest rate you’re charged but keeps your repayment amount the same.
For example, you have a $400,000 loan and put $50,000 in your redraw or offset sub-account, the interest charged on your loan would be calculated based on $350,000, which could reduce the total interest you pay monthly and increase the amount you pay towards the principal.
Alternatively, you can permanently apply the extra funds to reduce your loan limit with a permanent principal reduction. In this scenario, your monthly repayment amount would be recalculated based on your new limit.
Ask your lender if you can make extra repayments towards your mortgage and which option is best for you. Usually, those with variable mortgages can make additional repayments. See how additional lump sum and extra repayments can affect your home loan using our loan repayment calculator.
At loans.com.au , you can make unlimited extra repayments and lump sum repayments on your variable rate home loan and up $10,000 extra repayments per year on your fixed rate loan.
Increase the frequency of your loan repayments
Making fortnightly repayments is a simple and effective strategy to pay off your mortgage faster. By making 26 fortnightly repayments in a year, this works out to 13 full monthly repayments instead of 12. Let’s say you have a 30-year mortgage, this will be trimmed down almost 6 years when you decide to pay fortnightly. At loans.com.au, we offer monthly, fortnightly, or weekly repayments on all of our principal and interest loans so you can save more.
As an example, imagine you take out a $400,000 loan for 30 years at an interest rate of 5%. Your monthly payments will be $2,148. Over the duration of the loan, the total amount you repay will be $773,024 including both principal and interest.
If you switch from monthly to fortnightly repayments, you’ll be paying an extra $2,147 off your loan each year. This will cut the time it takes to repay your loan by three years and eleven months. You’ll also save $68,655 on interest charges over the life of your loan.
Makes changes to your home loan
Another option to reducing home loan interest is by making variation to your home loan. Here are the best ways you can alter your home loan:
Add an offset sub-account
A offset sub-account lets allows you to reduce the interest being calculated on your loan, using your savings. The funds in your offset sub-account will offset, or lessen the interest you have to pay on your home loan. Any money in your offset sub-account is offset against your loan balance, and interest is only charged on the difference.
For instance, your home loan is at $500,000. If you put $50,000 into your offset account, you’ll only have to pay interest on the remaining $450,000 instead of the $500,000. The more money you have in your offset sub-account, the less interest you have to pay on your loan. This means you can pay your loan off faster.
Your offset sub-account can act similar to a regular savings account with the main difference being that it’s linked to your mortgage.
Split your loan
A split rate home loan is a combination of fixed and variable loans. This option allows you to ‘split’ your loan into multiple separate accounts. The most common scenario for borrowers is to have two accounts, with one being a fixed interest rate and the other being variable.
These splits don’t have to be even either. You can do a 60:40 split for example where 60% of the loan is on a variable interest rate, and 40% is on a fixed rate.
Splitting your home loan lets you enjoy the benefits and flexibility of a variable rate including the ability to make additional repayments without penalty, and using an offset sub-account. Remember, the variable interest rate and repayments on your variable split can fluctuate depending on market conditions.
Plus, you can take advantage of having part of your loan on a fixed interest rate for a set period of time. This gives you repayment certainty on part of your loan and peace of mind knowing the interest rate can’t change during the fixed term. If you need to break the fixed rate period in the future, keep in mind that fixed rate break costs may apply.
Refinance your mortgage to a lower interest rate loan
Switching to another lender by refinancing your home loan may end up saving you a lot. Shop around for a lower rate loan and talk with lending specialists about your goals. Look for home loans with fewer fees. Typically, non-bank lenders like loans.com.au offer more affordable rates due to lower overheads.
Check your loan and rate and figure out which features you want to keep. Compare the interest rates of your home to other similar loans available right now, and see if you can get a better deal.
Aside from lowering your monthly repayments and shortening your loan term, refinancing your home loan also offer other benefits like giving you access to equity.
Before refinancing your loan, make sure it’s worth all the time and effort. Think about how it will affect you both in the short term and in the long term. A lower rate may be attractive, but it might not actually save you money.
Take the time to carefully calculate potential savings over the next year or two (perhaps, even longer) and ensure you’re comparing using the comparison rate. The cost of refinancing could negate the whatever savings you get on lower interest.
Important things to remember to lower home interest
Follow these key tips to help you successfully reduce the interest on your home loan:
Consolidate and reduce your existing debts
Having less debt means having more financial freedom to pay off your home loan faster. Also, you can’t make extra repayments or lump sum payments on your home loan if all your extra earnings are being used to pay off additional debt.
Consolidating your debts and paying as much down as possible before you buy a home will also improve your borrowing power when you come to a lender asking for a loan. Just make sure you balance paying down any existing debts with keeping enough money to put towards your deposit.
Avoid bridging finance or bridging loans
A bridging loan covers the time between buying a new property and settling on the sale of your existing one. If you want to pay off your new home loan quickly, it’s better not to have a bridging loan because it’s an additional loan you need to pay off.
If you really need to sell your home and buy a new one, find alternative places to stay like with friends or family in the interim, if possible.
Increase your regular mortgage repayments
Instead of paying the minimum loan requirement, try increasing the amount you’re paying regularly. Adding as little as $50 to your weekly, fortnightly. or monthly repayment can end up saving you a significant amount of interest in the long term.
Need a lower home loan interest rate?
At loans.com.au , we’re here to help you make the most out of your home loan. Whether you’re looking to start your home ownership journey or want to refinance, we’re here to assist you. Get in touch with our friendly lending specialist and let’s discuss your options.
Find out in under 2 minutes if you qualify for one of our low rate home loans.
About the article
As Australia's leading online lender, loans.com.au has been helping people into their dream homes and cars for more than 10 years. Our content is written and reviewed by experienced financial experts. The information we provide is general in nature and does not take into account your personal objectives or needs. If you'd like to chat to one of our lending specialists about a home or car loan, contact us on Live Chat or by calling 13 10 90.
