Be mortgage-free by your 50s

Some tips and tricks to paying off your home loan sooner.

Buying a home is likely the most significant financial transaction you’ll ever make. So it stands to reason that your home loan will be your largest ongoing financial obligation. Imagine what life would be like without that monthly or fortnightly strain on your income? With the extra money in your account you can afford to work less, travel more and do the things you’ve always dreamed of.
Most loan repayments are calculated on a 25 or 30-year term. And chances are you’ll have more than one home loan over your life if you upgrade to a new house. If you take out your second home loan at 35, you could still be paying it off as you hit 60. But with a few simple tips and tricks, you can shave money off your principal and pay off your loan a lot sooner. Even paying off a little more than you have to now will have a big impact over the life of the loan.

Tip 1. Shop around for a lower interest rate.

The competition out there for your business from lenders is fierce. Get in touch with me, by shopping around and finding a slightly lower interest rate and you could save money on lower repayments. What you do with this money you save can make a big difference.

One safe way is to keep paying the same amount you were previously paying to reduce the loan amount faster. Even a reduction of $150 per month adds up to $54,000 over the life of a 30-year loan. And, because you are reducing the principal faster, you’ll be reducing the amount of interest you have to pay, which will only increase the amount of principal you’re paying off if you maintain the original repayment amount.

Tip 2. Make your offset or redraw facility work harder for you.

Offset and redraw accounts are very handy add-ons to a mortgage. In fact, if your loan doesn’t have this feature, talk to me about your situation and it may be worth finding one that does. It’s an account that’s linked to your home loan, and any money in that account is considered a reduction in your principal loan amount. A lower principal means less interest to pay, and more of your ongoing repayments will be paying off more of your original loan.

The money in the offset/redraw account is generally accessible anytime. One way to make the most of it is to have your salary paid into this account. While the money is there, it reduces your interest. Even if you use a lot of this cash throughout the month, it’s topped up when you get paid again.

Simply by doing this, you could shave thousands of dollars off your mortgage, and months or even years off the life of the loan.

Tip 3. Get a new loan with a shorter term.

Refinancing your loan and choosing a shorter term is probably the simplest and most obvious way to paying off your loan sooner. The attraction to a 30-year term for many is to reduce the amount you pay every week, fortnight or month, to give you a little more cash in hand for other things. But taking five years off the length of a loan can save you thousands over the long-term. For example:

$500,000 loan at 2.50% interest p.a.

30-year term 25-year term
Monthly Repayments $1,976 $2,244
Total paid $711,218 $672,926

Tip 4: Round up your repayments.

By now, you probably realise that most of these tips are based around paying more off your loan than your repayments require. The amount of interest you pay is calculated on how much is left owing on the principal amount of the loan. Every extra bit of money you pay off the principal is effectively earning interest at the rate you’re being charged on your mortgage. Just a small monthly repayment increase on a $500,000 loan over 25 years, from $2,244 to $2,400, will not only reduce the length of your loan by two years and two months, but it will also save you more than $16,425 in interest payments.

It doesn’t take much to make a difference. Thanks to the length of loan terms, just regularly paying a little bit extra can grow into significant time and money savings over the years and make you mortgage-free in your 50s.

Get in touch to find out how you can reduce your current loan faster, or refinance to start saving.

 

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