Strategies for Accelerating Mortgage Repayment
Owning a home is a significant milestone, but the journey doesn’t end when you get the keys. For many homeowners, the next big goal is paying off their mortgage as quickly as possible. Accelerating your mortgage repayment can save you thousands in interest and help you achieve financial freedom sooner. Let’s explore some effective strategies to help you pay down your home loan faster.
Understand Your Mortgage Structure
Before diving into repayment strategies, it’s crucial to understand your current mortgage structure. Most home loans in the country are table loans, where your regular repayments remain the same throughout the loan term (unless interest rates change). Each payment includes both principal and interest, with a larger portion going towards interest initially.
Increase Your Repayment Frequency
One of the simplest ways to pay off your mortgage faster is to change your repayment frequency. Instead of making monthly payments, switch to fortnightly repayments. Here’s why this works:
There are 26 fortnights in a year, compared to 12 months. By paying half your monthly amount every two weeks, you’ll make the equivalent of 13 monthly payments each year instead of 12. This extra payment goes directly towards reducing your principal, helping you pay off your mortgage faster.
For example, if your monthly repayment on a $500,000 loan at 7% interest over 25 years is $3,534, switching to fortnightly payments of $1,767 could save you $117,000 in interest and shave four years off your mortgage term.
Make Extra Repayments
Whenever possible, make extra repayments on your mortgage. Even small additional payments can make a big difference over time. Many lenders allow you to increase your repayments by up to 20% above the minimum without incurring penalties. For instance, ASB permits customers to increase their fixed mortgage repayments by up to $500 per fortnight without fees.
Consider allocating any windfalls, such as tax refunds, bonuses, or inheritance, towards your mortgage. While it might be tempting to splurge on a holiday or new gadget, putting extra money towards your home loan can significantly reduce your interest payments and loan term.
Maintain Higher Repayments When Interest Rates Drop
When interest rates fall, resist the temptation to reduce your repayments. By maintaining your repayments at the higher level, you’ll pay off more of the principal each time, accelerating your progress towards a mortgage-free life.
Use an Offset Account
If your lender offers an offset account, take advantage of it. An offset account is a savings or transaction account linked to your mortgage. The balance in this account is offset against your home loan balance, reducing the amount of interest you pay.
For example, if you have a $400,000 mortgage and $50,000 in your offset account, you’ll only pay interest on $350,000. This can result in significant savings over the life of your loan.
Consider a Split Loan
A split loan, also known as a hybrid mortgage, allows you to divide your home loan between fixed and floating interest rates. This strategy can offer the best of both worlds – the stability of a fixed rate and the flexibility to make extra repayments on the floating portion without penalties.
Many banks, including ASB, offer the ability to mix fixed interest rates, floating rates, and revolving credit facilities within one loan structure. This flexibility can be particularly beneficial if you expect to receive lump sums or want to make additional repayments without incurring break fees.
Refinance to a Better Deal
Regularly review your mortgage and consider refinancing if you find a better deal. Even a small reduction in your interest rate can lead to substantial savings over the life of your loan. However, be sure to factor in any refinancing costs to ensure the move is worthwhile.
Use a Mortgage Offset Calculator
To understand the potential impact of these strategies, use a mortgage offset calculator. Many banks and financial websites offer these tools, allowing you to see how different repayment strategies could affect your loan term and total interest paid.
Seek Professional Advice
Every financial situation is unique, and what works for one homeowner may not be the best strategy for another. Consider consulting with a mortgage broker or financial advisor to tailor a repayment strategy to your specific circumstances.
Case Study: The Power of Extra Repayments
Let’s look at a real-world example. Jane and Mark took out a $800,000 mortgage at 5% interest over 30 years. By working with a mortgage broker, they structured their loan to allow fee-free overpayments of up to 10% of the balance owing each year. Thanks to their relatively high incomes, they’ve been able to reduce their mortgage to around $300,000 in just four years, saving hundreds of thousands in interest.
Conclusion
Accelerating your mortgage repayment requires discipline and commitment, but the financial benefits are substantial. By implementing these strategies – increasing repayment frequency, making extra repayments, using offset accounts, and staying informed about refinancing opportunities – you can significantly reduce your loan term and save a considerable amount in interest.
Remember, the key is to start early and stay consistent. Even small changes to your repayment strategy can make a big difference over time. With careful planning and dedication, you can look forward to celebrating your mortgage-free status sooner than you might have thought possible.
For more information and tools to help you manage your mortgage, visit resources like Sorted, MoneyHub, or speak with your bank or a qualified mortgage adviser. Your journey to financial freedom starts with taking that first step towards accelerating your mortgage repayment.