Paying your mortgage off as early as possible is not just about saving hundreds of thousands of dollars in interest. It is also about the fact that transferring that final payment and knowing that the bank no longer owns any part of your house is an amazing feeling! Having a fully paid off house is a key aspect of your financial security and hopefully. In fact, in Australia our whole retirement system is set up with the expectation that in order to have a comfortable retirement you have a debt-free home. It is not a privilege it is an expectation in the eyes of our government, and unfortunately, not everyone will be in this situation.
The rising house prices in recent years have led to much higher mortgage debt levels than we have ever seen previously. The bank managers have been laughing all the way to (you guessed it) the bank. They are getting paid so much more in interest even though the interest rates are at historic lows. The size of the loans makes it more difficult to make higher than minimum repayments but it doesn’t take that much extra per week in order to shave years off your loan. If you make a plan and stick with it hopefully you can achieve a mortgage-free home in less than the 30 years that the bank wants you to take.
Use the Moneysmart mortgage calculator to see the crazy savings you could have if you cut your 30-year mortgage to 15 years. Using this calculator we calculated the following
| Mortgage Amount | Interest rate | Term of Loan | Weekly Repayment | Total Interest paid |
| 400K | 2.64% | 30 years | $374 | $182 790 |
| 400K | 2.64% | 20 years | $497 | $117349 |
| 400K | 2.64% | 15 years | $623 | $86 314 |
| 400K | 2.64% | 10 years | $878 | $56421 |
The savings speak for themselves not to mention not being tied to the bank for most of your working life. There is only a $124 difference per week between taking 20 years to pay out your loan or 30 years but it will save you a whopping $65441 in interest.
Some tips to pay your mortgage off early.
- Find the best interest rate for your loan and beware of honeymoon rates. Shop around! Don’t just stick with your current bank for the sake of convenience. There is a lot of competition when it comes to home loans and they will be prepared to negotiate in order to keep you banking with them. Some of the smaller lenders outside of the big four have really competitive interest rates for home loans. Also make sure you understand the fine print and conditions of your loan. Some lenders will offer an attractive honeymoon fixed rate for the first few years but then switch to a much less competitive variable rate. Make sure you have a complete understanding of what you getting into and also know what the penalties would be if you were to refinance with another lender down the line.
2. Automate the maximum payment you can afford and pay it fortnightly or weekly. You will end up paying more off your loan if you pay fortnightly instead of monthly. $400×26 fortnights in the year totals $20800 per year where as $1600 Per month x 12 months of the year totals $19 200.
3. Rent out a room. If you have a spare room or two are you able to get a housemate? This is especially relevant if you are a young couple or single person without children. Renting a spare room out over a few years could make you around 10K per year. There can even be some tax havens by charging someone board rather than rent. However, every situation is different so seek the right tax advice. Using this money to add straight into your mortgage payment will be worth it in the long run.
4. Do not redraw from your loan. If your loan has a redraw facility you might be tempted to dip into this in order to update your kitchen or buy a new car. Avoid this trap at all costs! The reason’s the banks give you this redraw option is that they know when money is easily accessible, people will usually spend it! A redraw facility can be helpful in a time of crisis but if you struggle to resist temptation when it comes to ‘available’ funds, maybe think twice about having this as part of your loan set up.
5. Consolidate your debt. If you do have a redraw facility available as mentioned above and you also have consumer debt such a a car loan, credit card or personal loan, you could use this to your advantage. If the interest rate is higher on your consumer debt loans (which chances are it will be) then consider redrawing the available funds from your mortgage to pay off this debt. Now your only debt will be your mortgage and it is most likely going to be at a much lower interest rate then your credit card was charging.
6. Delay renovations. Can you live for a few years with an ugly kitchen and 20 year old stove? The answer is yes you can. Delay spending that money on renovations until you have attacked the principal of your loan. The early years of the mortgage are when you will pay the most interest overpay it early and you will save big in the long run. Renovations are good in the sense that they add value to your property (in most cases) however they don’t need to be done a month after you move into your new home.
7. Any excess money or windfalls go straight on the mortgage. That means tax refunds, commission payments and any raise in income go straight towards paying your loan. If you can get a side hustle to generate some additional income that is even better! Any additional payments you make towards your mortgage outside of your regular payment will be attacking the principal. You want to be doing this as much as possible if you want to become mortgage-free sooner.
8. Utilise an offset account. Usually you will be able to have an offset account or a redraw facility. An offset account is a transaction account linked to your home loan. You can make deposits or withdraw from it as you would with a bank account. The difference is that when you have money in an offset account, you can reduce the amount of interest charged on your home loan. EG if you have $20000 in your offset and a $400K mortgage you will only pay interest on $380K. We all need to have money for living expenses and saved for emergencies so this can be a good option to utilise. You might even use it as your regular bank account and have all your money sitting there. The more you have in this account the better due to the interest you are saving.
9. Try and avoid LMI in any way you can. In an ideal world, that means you have a 20% deposit but if not you could potentially get a family member to guarantor you for the remainder. If you only have 10% deposit they could guarantor you the remaining 10% to avoid the LMI costs. There are also certain schemes for first home buyers that might help you get into the market to avoid LMI with a much smaller deposit, however, these vary state by state. This scheme is called the First Home loan deposit scheme.
There are many arguments made for and against paying off your mortgage early. Due to interest rates being at historic lows some people use this cheap line of credit for other investments such as buying shares known as debt recycling. There are many effective ways of utilising those sorts of wealth-building tools if you have the confidence and knowledge to do so. However, for some people debt is uncomfortable and unpleasant. Financial freedom is an end goal that can be achieved by following many different pathways. If a mortgage-free home is a part of your financial plan then focusing on paying down your debt as quickly as you can will give you amazing peace of mind. It also means you will have so much more income freed up once your debt is paid, in order to invest in other assets.
