How to pay off your mortgage faster

Your home is likely the biggest financial asset you ever purchase with your mortgage the biggest financial liability you ever have. Paying off a mortgage is a great financial achievement and this is how you can pay off your mortgage sooner.

1)     Reduce your expenses freeing up cashflow

This could be done in many ways from reducing insurance costs, saving on bills or reducing how much you spend on luxury items such as restaurants and alcohol. To assist with this process check out my tips on how to budget and save money.

2)     Setup higher regular payments

Rarely will anything you do have as much benefit as making higher repayments. This is because 100% of the repayments made above the minimum are used to pay down the principal. Start off small and work your way up. As an added bonus this is a great way to build up emergency savings in a financially efficient way.

3)     Try and make lump sum payments early

Due to the nature of compounding interest money contributed at the beginning of your mortgage will have a much larger effect than contributions made towards the end of your mortgage.

4)     Pay off your loan as fast as you can

Ok so that is what this list is about right so why put it in here? Because the faster you pay off your loan the easier it is to pay off your loan quickly. Let me explain, if you take out a loan of $400,000 at 5% for 25 years you will pay $701,508 over the term of your loan. If you pay the loan out over 10 years rather than 25, you will pay $509,114 over the term of the loan. That is a saving of $192,394.

5)     Make your repayments as frequent as possible

Your loan interest is charged monthly but calculated daily so the less you owe each day the less interest that is charged. Therefore if you are paid weekly or fortnightly you can pay off your loan faster simply by making weekly or fortnightly repayments.

6)     Avoid interest only mortgages

Interest only loans can be used as a way of freeing up cashflow to pay for things like home improvements and furniture in the first years of purchasing a property. The cost of doing this is high because interest only mortgages come with a higher interest rate than property and interest mortgages. Additionally once your interest only period has finished your repayments will jump up much higher than if you were making principal and interest repayments from the start making it harder to make extra repayments.

7)     Regularly review your mortgage

In such a competitive market banks are always fighting to obtain and retain customers. It is ideal to keep an eye on the interest rate you are paying vs the market rate, what fees you are paying and what is included in your loan such as offset accounts, fee free transaction accounts and credit cards. Also don’t be afraid of lenders without branches offering lower rates as they can still be reputable and of high quality.

8)     Consolidate your debts

If you have enough capital in your property it maybe beneficial to consolidate your debts. This is because traditionally mortgages have the lowest interest rates of all forms of debt but make sure you used your freed up cashflow to make extra repayments to your mortgage otherwise you may be worse off with a longer loan term.

9)     When refinancing retain the same loan term.

It is common for people to look at refinance their mortgage every 2+ years to make sure they are getting the best deal. A mistake often made is to extend the loan term back out to the full 30 years each time which will reduce your repayments and free up cash flow with no extra repayments made. This can leave you worse off than when you started.

10)  Talk to a financial advisor about debt recycling strategies.

A debt recycling strategy involves borrowing more money against your property for investment purposes. The objective is to seek out investment returns higher than the cost of borrowing in a tax effective manner. Anytime money is borrowed for investment purposes it is called gearing and after inappropriate gearing strategies during the global financial crisis many people have been weary of gearing. Gearing does have its risks and needs to be managed with caution but under the right circumstances, with the right planning and advice can be the most beneficial long term strategy to paying off your mortgage faster and more effectively.

Strategic and product debt advice is a main focus on my business and included in holistic financial advice. If you would like to learn more about how you can pay down your debts sooner visit my Brisbane office or contact me here.

What you need to know

Constancy Wealth Management Pty Ltd ABN 51 168 427 361 trading as Constancy Wealth is an Authorised Representative and Credit Representative of AMP Financial Planning Pty Limited ABN 89 051 208 327 Australian Financial Services Licence 232706 and Australian Credit Licence 232706.

This information does not take your circumstances into account, so read the relevant disclosure documents and consider what’s right for you. If you acquire an AMP product or service, AMP companies and/or their representatives will receive fees and other benefits, which will be a dollar amount and/or a percentage of either the premium you pay or the value of your investments. Ask us for more details.

This post contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information