Home ownership is considered to be the Great Australian Dream, but with property prices in capital cities and regional areas seemingly sky high, it’s likely you’ll need a mortgage to make this a reality. So what can you do to reduce your debt and pay off your mortgage faster?
Your home loan repayments are likely to be your biggest ongoing household expense. If you live in a property you’re repaying a mortgage for, you’ll want to ditch your debt to increase your household spending. If you’re investing in a property you’ll be able to pocket your ‘passive’ rental income and ditch this profit-eating expense for good. Whether you’re an owner-occupier or an investor, paying off this debt and living mortgage free is an ideal outcome you’ll want to achieve as quickly as possible.
Let’s explore some of the most popular ways Australian homeowners can consider reducing their debt and paying down their mortgage sooner.
How to reduce your home loan balance and repay it faster
There are a multitude of simple ways homeowners can chip away at their loan principal, lower their interest charges, or shorten the loan term, in Australia. The best option for you will depend on your financial situation, budget and specific home loan goals, so compare your options carefully before proceeding.
1. Make extra repayments
Arguably the most straightforward way to reduce your loan principal faster is making extra payments on top of your existing mortgage repayments. By lowering your loan amount owing through additional repayments, you may shave years off of your mortgage, and also reduce your interest charges over time.
For example, Reduce Home Loans Extra Repayments Calculator shows that a borrower with a $500,000 home loan with 25-years remaining paying an interest rate of 4% would pay $2,639 in monthly payments. If they paid an extra $250 a month in extra payments, they may be able to save $45,050 in interest charges, and shave three years and six months off of the life of the loan.
Impact of extra repayments on $500k home loan
|Total debt repaid
|Total loan term
|Without extra repayments
|With extra repayments ($250/mth)
|21 years, 6 months
Source: ReduceLoans.com.au. Hypothetical example based on $500k home loan with 25-years remaining at rate of 4.00%, making monthly extra repayments of $250. Does not factor in fees or rate changes.
It’s not just regular repayments that you can make, but you can also put any windfalls you earn over the year into your mortgage as a one-off lump sum payment. Consider depositing any extra money you earn, such as your tax refund, straight into your mortgage, or even selling some older possessions on Gumtree or Facebook Marketplace for extra cash. Payments don’t have to be thousands of dollars, even just paying an extra $200 once or twice a year can make a big difference in the long run.
Remember – every bit counts in paying less interest, and any extra funds deposited may get you on the way to being a homeowner sooner than expected. Just keep in mind that not every lender allows its home loan customers to make extra repayments without penalty, so be sure to check the fine print of the Product Disclosure Statement (PDS) before proceeding.
2. Reduce your interest rate, keep same repayments
What if you want to make extra repayments but do not have room in your budget to do so? A similar strategy to making repayments – with a twist – is refinancing to a lower rate home loan lender, then continuing to make the same mortgage repayments as you were before. You will essentially be making extra repayments, but you already know you can budget for this higher amount as it was what you were paying for your previous mortgage.
For example, on the same hypothetical loan above, the borrower refinances to Reduce Home Loans’ Economizer Variable 60 home loan, charging a rate of 3.49%. Their monthly repayments are now $2,500, but they continue making the same, higher repayment amount as the original home loan of $2,639. Without adjusting their budget at all, the homeowner is making extra repayments of $139 a month.
Another advantage of this option is that you may be able to refinance to a home loan that is offering more competitive features than those offered by your current provider. These features may be utilised to help you reduce your interest charges and loan term, as outlined below.
3. Take advantage of your offset account(s)
An offset account is a linked transaction account that works to reduce, or “offset” your home loan interest charges through any funds deposited into it. If your home loan has the capacity to link a 100% offset savings account, it could be worth considering taking advantage of this to reduce your interest charges.
For example, if your mortgage is $500,000, and you have $50,000 in your offset account, you will only be paying interest on the home loan as if it had a balance of $450,000, as opposed to the full amount.
Every dollar you deposit into an offset account reduces the amount of interest you pay on your mortgage. So, in an environment of rising interest rates, homeowners may want to consider utilising these types of features to lessen the impact of higher interest rates on their mortgage repayments.
4. Consider fortnightly repayments
Most mortgages come with weekly, fortnightly or monthly repayment options. Another trick to consider that may help to reduce your mortgage repayments is switching to fortnightly repayments instead.
Let’s say your monthly repayments are $2,500, after a year you would have paid $30,000 (12 x $2,500). A fortnightly payment would split this in half, making your repayments $1,250 instead. Now, the lender will request you make fortnightly repayments 26 times in a year, equating to $32,500 ($1,250 x 26).
Put simply, by switching to fortnightly mortgage repayments you may be able to make an extra repayment each year towards your mortgage, without the effort of lump sum deposits or refinancing.
5. Consider your interest rate strategy
The interest rate charged on your mortgage is arguably the biggest factor that impacts the ongoing cost. This is why it can be so important to choose your home loan interest rate type carefully, so you’re considering how the market impacts your repayments.
A fixed rate home loan will lock that rate in for a set period, typically 1-5 years. This offers you protection in a rising rate environment, and can provide greater stability in your budgeting as your repayments will not change over this period. Comparatively, a variable rate home loan is subject to market fluctuation, and if rates were to fall, you would immediately see the benefit to your repayments as your lender – in theory – should pass this rate cut on to you. Variable rate home loans are also the most likely to come with helpful features, like an offset account, as some lenders do not link these to their fixed rate products.
If you’re looking to take out a home loan, or considering refinancing, it’s worth taking some time to look at the market and make an informed assessment of which rate type could help you keep your repayments lower. However, if this feels too challenging, you could consider splitting your home loan rate between the two options. A split loan allows you to choose which percentage of your repayments will be on a fixed rate, and which will be on a variable, allowing you a ‘best of both worlds’ approach to your repayments.
Another interest rate strategy some borrowers take is switching to interest-only repayments. This may be worth considering as an owner-occupier if you’re seriously struggling to meet your loan repayments and need a reprieve. Interest-only loan repayments will see a borrower only pay their interest charges, not their principal owing, for a fixed period, reducing their repayments dramatically. However, by not paying off your principal owing, you’re not chipping away at your debt at all. When the interest-only period ends, your repayments will be much higher, as you’ve not lowered your loan amount but simply reduced your loan term. If you consider this option, it’s worthwhile ensuring you can afford the higher repayments once your interest-only period ends.
Is home loan debt a bad debt to have?
While paying off your mortgage as quickly as possible is the goal for most homeowners, it’s worth keeping in mind that a mortgage is considered to be a “good” debt to have. It is an indication that you have a foot on the property ladder and you’ve made an investment on an asset for your future.
Unlike, say, an outstanding credit card balance, having a home loan debt will generally not hurt your credit score or impact your creditworthiness when applying for other credit products. In fact, it can be beneficial to have a mortgage come tax time. Home loan investors may claim their mortgage interest charges as a deductible, and use this to reduce their taxable income each financial year they have a mortgage. All that to say, having a home loan balance outstanding is not as concerning as some other types of debt.
However, if your mortgage repayments are starting to become a point of financial stress, and you’re struggling to budget for your repayments, it can be worth following one or more of the steps listed above to give yourself some breathing room.
One of the best ways a homeowner can help themselves in a time of higher interest rates or difficult mortgage repayments is considering refinancing to a more competitive home loan. If you’ve been repaying your mortgage for some time and have built up some equity, you could be in a position to refinance to a lower interest rate, lower fee, feature-abundant home loan lender.
Please consider speaking to our team of experts today at Reduce Home Loans about refinancing to one of our competitive home loans.
Any statements are general in nature and do not take into account your financial personal situation, objectives or needs. You should consider whether any statement/s is suitable for you and your personal circumstances. Before making any financial decision, consider your circumstances and the product disclosure statement.