There is no secret to paying off your mortgage faster; while you may be disappointed to learn this, it is actually a good thing because you don’t have to follow a strange budget or download any special account keeping software to own your home sooner. Instead, you can use these five simple tactics which almost anyone can achieve, regardless of their loan size, their lender or their property goals.
1 – Understand how your mortgage repayments work
You can’t beat a system if you don’t understand how it works, because your lender wants you to take the full 30 year term to repay your home loan, so that they receive the maximum amount of interest. That is because your repayments have been calculated using the mortgage amortisation process where each payment repays the interest calculated on the principal loan amount over the payment period, plus the amount of your principal loan which will reduce the loan amount over the term of the loan.
As a result, your mortgage repayments are comprised primarily of interest repayments, with just a small amount going towards paying down your principal. This means over the life of your loan, you could have easily repaid more in interest than your original loan was for.
However, when you pay your mortgage off faster – and you can, your lender just doesn’t want you to – you pay less interest because your additional repayments reduce the principal loan amount, and if interest is calculated on a smaller principal amount, there is less interest to pay. Therefore, your goal in repaying your mortgage faster is to accrue less interest between your repayments, and to reduce the term of your loan so there is less time for interest to be accrued.
2 – Pay more than the minimum amount
The first way you can accrue less interest is to reduce the loan amount between the times that interest is calculated by paying above the minimum monthly repayment. You can do this in a number of ways:
• Schedule a direct mortgage repayment each month for more than the minimum loan amount.
• Make direct payments to your loan throughout the month when you have funds left over.
• Pay lump sum amounts when you can from tax returns, an inheritance or a gift.
• Do all of the above for the maximum results.
• Make sure you are not charged for making additional repayments, and speak with your lender to be sure your additional repayments will be applied to the principal loan amount.
3 – Make your repayments more often
This doesn’t mean you need to increase the amount you pay again, it just means avoid waiting to make monthly repayments if you can. If you can afford to make weekly or fortnightly repayments to your mortgage you can pay off debt fast because there are more opportunities to make a repayment. For example, if you were paying your mortgage monthly, you’d make 12 repayments in a year, but if you were paying fortnightly, you’d make 26 payments, which equates to 13 monthly repayments.
Your interest goes on being calculated daily or monthly depending on your lender, but the interest has less chance to compound and can save you even more.
4 – Choose a shorter loan term
The typical loan term is 30 years which is almost an unimaginable amount of time to be paying off your home, however if you shorten your loan term from 30 years to just 15 you can half the interest you pay and save hundreds of thousands of dollars, plus you’ll own your home sooner.
For example, a $250,000 loan amount at 6.61% interest:
Over a 30 year term :
• Equals a $1,598.30 monthly repayment
• In total you will be repaying $575,387.52
Over a 15 year loan term:
• Equals a $2,192.91 monthly repayment
• In total you repay only $394,724.63
This is just an extra $594 to pay each month, less than an extra $150 per week, but a saving of over $180,000 and of course 15 years.
If you don’t want to put that sort of pressure on your finances, you can still calculate the amount you will need to repay to pay off your loan in 15 years, and pay that amount as often as you can. In the months you can’t meet the higher repayment you are still on a 30 year loan term with lower repayments, but you build up principal reductions when you can.
5 – Refinance to a lower interest rate
If you have been repaying your home loan for some time – at least 3-5 years – then you may be eligible to refinance to a lower interest rate loan. New loan products are being released all the time, not to mention interest rates change daily and there could be a different loan product or a different provider with a lower interest rate loan which suits you. Refinancing is not a decision to be made lightly, as you can pay hundreds of dollars in refinance fees, and even more if you are in a fixed rate term. Therefore, speak with your current lender first to see if they can apply a lower interest rate to your loan or recommend another loan product and waive the loan transfer fees because you are a loyal customer.
Lenders will actually be more willing than you may think to negotiate on the interest rate because while a rate may look low to you, the lender is able to play the waiting game – waiting for that interest to add up over the term of your loan. When you are charged a lower interest rate on your loan, your repayments will also be less, however, if you can maintain the same monthly repayment, this additional amount becomes an additional repayment and reduces your principal loan amount and term.
If you are in a position to refinance then you may have already repaid a significant portion of your principal loan amount. Therefore, consider refinancing to a shorter loan term at the same time because the difference in repayments on a shorter loan term is likely to be around what you are used to, but you will have slashed years off of your loan.
Before you think that paying off your mortgage faster is not worth the hassle, to save just a few years, remember that in focussing on these few tactics to loan repayment, you can save more money than you would in any savings account, and you can put that money towards your next investment.
Alban is a personal finance writer at Home Loan Finder, where he helps people to review and compare home loans online.