5 ways to pay off your home loan faster and save serious money

Posted: 2 July 2019 3:45 pm News

A man and his son outside a house under a blue sky.

Avoid unnecessary fees, get a low interest rate and use flexible features to maximise your mortgage repayments.

Here's the hard truth about mortgages: most lenders want you to take your time paying them off. The longer you take to repay your loan the more interest you pay.

Some mortgages even make faster repayments difficult, with costly fees and restrictions on how you can make repayments. And Australian borrowers are catching on. A recent survey by Athena Home Loans found 57% of Australian borrowers felt their lender didn't want them to pay off their mortgage sooner.

But Australians want to get out of mortgage debt faster. 79% of borrowers in Athena's survey said they'd switch lenders if they could pay off their loan faster. And with good reason. According to Finder research 40% of Australian homeowners live month to month while paying off their mortgages.

Here are five ways to pay off your mortgage faster and get your home loan debt under control. And if your mortgage makes it hard to do this, then it might be time to switch.

REFINANCING IN 2019

Finder's Refinancing in 2019 series is presented by Athena's 3.09% variable rate (principal and interest, for owner-occupiers). Compare your home loan and save by refinancing with a lender where existing customers get the same new customer rates on like-for-like loans. Find out more.

1. Keep your interest rate low

There are two parts to a home loan: the principal and the interest. The principal just means the amount of money you borrowed and the interest is what the lender charges on top of that.

The lower your interest rate, the less interest you pay. Let's look at a quick example. Say you borrow $400,000 to buy a home (which is around the average Australian mortgage, according to the Australian Bureau of Statistics ). And say you get a 30-year mortgage with an interest rate of 4.10%.

Using Finder's loan repayment calculator, we can see your monthly repayments would be $1,932.

But what if you switched to a home loan with an interest rate of 3.09%? Your monthly repayments would drop to $1,705.

That's a difference of $227 a month or $2,724 a year. If you decide to use those savings towards paying off your home loan faster you'll end up saving even more.

It's hard to know what a competitive interest rate looks like because rates change all the time and there are so many loans and lenders out there. Your lender may be offering a lower rate to attract new customers while keeping you on a higher one, even if your borrowing situation is similar. Introductory rates of this type often get increased once the initial offer ends.

Athena Home Loans offers an automatic rate match to all borrowers. If Athena's offering an enticing low rate for new borrowers on the same loan type as yours, you'll get that rate too. To help borrowers repay their loans faster, Athena will discount your interest rate by 0.01% for each of the first five years of your loan, helping you pay off your loan even faster without having to do anything.

2. Avoid mortgage fees

Finding a home loan that doesn't charge you fees is one way to keep your costs down so you can focus on repayments.

Finder analysed all the upfront fees that come with mortgages from across the market and found the average borrower pays $686 in fees just for getting a mortgage in the first place. And then there are ongoing fees, which typically cost between $120 and $395 a year.

There are a handful of lenders who charge almost no fees, while Athena Home Loans doesn't charge any fees at all. Getting a loan with no fees will save you hundreds of dollars, which is money you can put right back into your home loan.

3. Make extra repayments

An extra repayment is when you pay more than the monthly repayment required by your lender. This extra money reduces your loan principal further, meaning you pay less interest.

Let's use the same example again: a $400,000 mortgage over 30 years. Let's imagine you pay off the loan for 3 years at 4.10% but then refinance to a low 3.09% rate.

According to Finder's extra repayment calculator, if you put that $227 monthly saving into extra repayments in the third year of your mortgage, you'd end up repaying your loan in 25 years and 5 months instead of 30 years.

That's 4 years and 7 months faster, which would save you $33,298 in interest.

Not all home loans allow you to make extra repayments, but if yours does then it can be a very effective way to get out of debt faster and save money.

If you're serious about speeding up your home loan, look for one that does allow extra repayments.

4. Use an offset account or redraw facility

Extra repayments are a great way to speed up your home loan, but what if you don't have money to spare? Isn't it risky to throw all your savings into your mortgage?

If your loan has an offset account or redraw facility you can enjoy the benefits of extra repayments and still access your money when you need it.

An offset account is a bank account attached to your loan. And when you put money in it you don't gain interest. Instead, your lender treats that money as an extra repayment, reducing your mortgage principal.

Your monthly repayments will stay the same and this means you're paying off less interest and more of the loan itself. If you need to spend this money you can simply withdraw it.

A redraw facility functions in a similar way to an offset account. There's no bank account, but you make extra repayments on your mortgage. If the loan has a redraw facility you can withdraw the extra repayments and spend them as you need them.

This has a similar benefit to an offset account.

Redraw facilities are often less flexible than an offset account and come with fees or minimum redraw amounts. But there are a few lenders, like Athena Home Loans, that offer a flexible redraw facility that doesn't charge you fees or restrict how much or how little you can redraw.

5. Make fortnightly repayments, not monthly

We've talked about monthly repayments, but if your loan allows for flexible repayments you could actually make repayments every two weeks. And this will get you out of debt faster.

How? Well, there are only 12 months in a year but there are 26 fortnights. If your monthly repayment was $2,000 you'd be repaying $24,000 a year (12 times 2,000 is 24,000). With fortnightly payments you'd be repaying $1,000 per fortnight, or $26,000 per year (1,000 times 26,000).

Making more regular repayments is always smart. Your lender calculates interest based on how much of the loan principal is remaining at the end of each day. So even if you made repayments every week you'd end up paying less interest.

What if my home loan won't let me pay it off faster?

If you currently have a home loan that isn't flexible enough to pay it off faster then you should look at switching to one that does.

REFINANCING IN 2019: THE SERIES

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