Financially Free

July 28, 2022

Your home loan repayments are likely to be the biggest, most significant monthly expenditure that you will experience.  It is worth mentioning that a rough translation of the word mortgage is “contract until death” and for some, this sadly remains true. The good news is, there are ways to pay off your home loan faster than you may have thought possible. 

There are many factors affecting how long it will take you to pay off your home loan, the key ones being: type of loan, principal loan amount and repayment frequency. 

Type of Home Loan

Fixed rate

The rate won’t change for an agreed term. This means the repayments are predictable. Lenders may offer fixed terms between one and ten years; however, most fixed rate terms are between one and five years. After this, the rate will revert to a variable rate or you can elect to fix it again at the then current fixed rates. 

Variable rate

Variable rates depend on the current economic climate; when inflation is high, the cash rate goes up; when inflation is lower, the cash rate decreases. 

Split loans

This happens when you split your home loan balance into two loan accounts with a portion of the loan at a fixed interest rate and the remaining balance at a variable interest rate. 

Principal Loan Amount

Principal Loan Amount just means the amount of money you borrowed from the bank. The larger the deposit, the less your principal amount is. If you are borrowing over 80% of the purchase price, then LMI (Lenders Mortgage Insurance) will be added to the principal amount as well. 

Repayment Frequency

This is how frequently you pay your mortgage. The more repayments you make, the better. Repayments are typically weekly, fortnightly, or monthly. 

Strategies for Paying it Off Faster

The traditional way to manage this huge debt is to pay interest regularly and slowly reduce the principal owing every month until you finally own your home free and clear. However, this is not the only alternative. Here are some strategies you might consider: 

Check your interest rate 

Ensure your current home loan is at a competitive rate.  A 0.5% saving on an average $400,000 home loan could see you take nearly 3 years off the term of your mortgage if you maintain the same monthly repayment.

Make bigger repayments more often

One of the simplest ways to pay off your mortgage faster is to make regular extra payments. You don’t need to save a big lump sum to do this. Making a small additional payment every couple of weeks can reduce the time it would normally take to pay out your home loan by years.  

Rent out space for extra cashflow

Why not supplement your income by renting out a spare room or the garage, or any other space that you are not using. As the cost of living continues to rise, this is a fantastic way to make extra money while materially reducing your overall financial risk.  And if you put the rental income into your mortgage, it will take years of your home loan.

Put extra cash straight into your home loan

Imagine how much further ahead you would be if you put your bonus, overtime, car allowance or other incentives straight into your home loan.  

Consider debt recycling

Debt recycling is a method of paying off your home loan by using equity in your home to invest in assets that produce income. These assets could be an investment property, a share portfolio or even your superannuation.  The income from your investments will then pay off your home loan, so you can pay it off faster than if you were making regular monthly repayments. Debt recycling requires planning and discipline and is not without risk. Talk to a mortgage planner who specialises in debt recycling to see if this strategy is for you.  

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