A mortgage typically takes a long time to pay off, leaving many Australians burdened with debt that takes up precious time and money. Paying off your mortgage faster removes the headaches and saves a lot of money in interest payments.
The biggest benefit of paying your mortgage off quicker is that you reduce the total amount paid to pay off your house. The faster you pay off your house, the less interest you pay to the bank. This means you have more money to do things you enjoy in life – or as our financial planning team would say, investing for your future!
There are a number of different options to get ahead of your mortgage payments and save a lot of money in the long term. The below is a list of the easier to implement changes than can pay big dividends.
Mortgage offset account
A mortgage offset account acts like a regular transaction account in which your wages can be directly deposited and withdrawn from the account. Money in an offset account offsets the principal amount on a mortgage loan, meaning you pay less interest.
For example, you currently have a mortgage of $700,000 and you have $50,000 in an offset account. Instead of paying interest on the $700,000 mortgage, you only pay interest on $650,000 of the loan. As you are paying less interest with an offset account, you can pay off your mortgage faster.
Home loans with mortgage offset accounts often come with higher fees and are not always provided by banks. If you are actively using the offset account to reduce interest payments, the benefits will outweigh the higher fees.
If you are disciplined in your spending, this can be combined with a credit card to allow you to get maximum benefit from each month’s wages keeping money in your offset account longer prior to paying off the card each month.
A redraw facility is a little like a mortgage offset account where you can store some cash for future use like private education fees. You pay less interest on your home loan from the money that is sitting in the redraw facility. A redraw facility differs from an offset and transaction account as you cannot directly deposit your wages into the account.
A redraw facility allows you to access the additional payments you have made on your house as a form of saving for future use. Redraw facilities also differ from mortgage offset accounts as almost all banks provide the service.
Redraw facilities are a great way to pay your mortgage off faster with extra contributions.
By changing your mortgage payments from full monthly payments to half your regular payments each fortnight, you are paying your mortgage off faster. Increasing your payment frequency to fortnightly means you are paying off an extra month’s worth of repayments every year (forced savings).
Paying money in more regularly also reduces the interest payable on the loan. It’s only a small benefit each year, but every bit helps and compounds over time.
Over the life of a loan, you are paying less interest as you are paying more into your mortgage and saving on interest.
Make additional payments
You can take advantage of low-interest rate periods to pay more off your mortgage. During high-interest rate periods, people struggle to meet mortgage repayments. Making extra payments when interest rates are low reduces the amount of overall interest you pay and reduces the length of your mortgage.
By reducing your spending on unessential items, you can afford to contribute more of your income to extra mortgage repayments. As you pay off your mortgage faster, you also save yourself on interest payments.
The key takeaway here – never pay the minimum if you can afford to pay more.
Financial planning is all about the big picture. Our financial planners in Perth take the time to understand your current situation, along with your short and long term goals.
Taking time today to think about ‘future you’ can make all the difference to your ultimate retirement. By understanding what’s important to you we can help you make educated and informed decisions on the options available to you with the ultimate aim of putting a plan in place to get you to where you want to be.
Our proven financial planning strategy delivers consistent results. We put you in control of your financial future by following a consistent, specific and methodical process of getting to know you, analysing the options you have available and developing a strategy that connects the dots between your financial decisions and what’s important to you. Financial planning is an ongoing task, and our experienced team of financial planners are always working hard behind the scenes to adjust your investment mix based on market trends and any changes in your personal circumstances.