While home ownership rates in Australia have declined over recent years as prices have risen, particularly in Sydney and Melbourne, there are still approximately 60+% that own their own home, with 31% owning their own home outright, according to the 2016 census. That leaves approximately 30% that are slowly working at getting rid of their mortgage / home loan year after year. While a mortgage is certainly not at the top of the list when it comes to ‘bad debt’, let’s first consider the impact of repaying your mortgage early and why you might want to consider it.
Let’s consider a simple example of purchasing a new property for A$600,000. Now I realise this isn’t buying you a great deal in Sydney or Melbourne at today’s prices, however this is just for illustrative purposes. For this property of A$600,000, we’ll assume that you borrow 80% to avoid the need for Lender’s Mortgage Insurance. This equates to a mortgage of $480,000, and for the purposes of this exercise, we’ll assume an interest rate of 5.0%.
Let’s look at how the total amount of interest you will pay changes with your repayment periods:
- 30 Years – $395,552.22
- 25 Years – $320,398.77
- 20 Years – $248,812.08
- 15 Years – $180,954.20
It’s quite alarming to realise that by simply reducing the repayment period on your loan by 5 years, you are close to having enough to fund the deposit on another investment property.
Now that you understand the why, let’s explore what strategies can you put into place to get rid of your mortgage as quickly as possible. Below we’ve highlighted 4 simple strategies that you can put into action to pay your home loan off early and get out of debt as quickly as possible.
1. Make Weekly Repayments Instead of Monthly
The majority of home loans will default to monthly repayments, but most offer the ability to make both weekly and fortnightly payments instead. Is it better to make more frequent payments? In short, yes! The reason for this is because interest is typically calculated daily, so the more frequently you’re reducing the outstanding loan balance, the lower the overall amount of interest you pay will be. Let’s take a look at this in action.
Let’s go back to our original example of a purchase price of $600,000 with a mortgage of $480,000 and interest rate of 4.5% p.a. We’ll assume 30 year mortgage term for this particular example. The total interest payable for each repayment frequency would be as follows:
- Monthly – $395,552.22
- Fortnightly – $395,135.16
- Weekly – $394,956.38
By simply changing the frequency of your loan repayments from monthly to weekly, you’ve just saved $595.84. While you might be thinking this isn’t a great deal of money and certainly isn’t going to change your life, and chances are you’re right, but remember you haven’t actually contributed any extra money and it hasn’t cost you anything to make this saving.
2. Convert Your Monthly Repayments Into Fortnightly
This is a simple strategy to allow you to repay your loan faster by making a small number of extra repayments each year, without actually noticing a difference to your disposable income. This is achieved by taking your monthly repayment amount, dividing it by two and instructing your bank to deduct this amount each fortnight. You’ll note that there 12 months in the year, and 26 fortnights, which means that you’ll end up making 2 extra repayments each year, which could shave off approximately 4 years from your mortgage.
If you’re thinking ‘well that sounds great, but I can’t afford to make extra repayments’, we would encourage you to read David Bach’s ‘The Automatic Millionaire’ and consider your ‘Latte Factor’. You can check out his calculator here.
3. Consider Refinancing Your Existing Loan/s
Many of us, particularly as Australian expats, get busy with our professional lives and spending time with our family, and we don’t pay our finances the attention they deserve. You may have been on a Fixed Rate loan that has now expired and your interest rate has reverted to the Standard Variable Rate, which could be up to 1.5% or more higher than what it could be. Review your interest rates and consult a professional where necessary to ensure that you’re getting the best rate you can be.
Let’s consider what a difference an interest rate saving of just 0.5% p.a. makes over the 30 year life of our $480,000 mortgage.
- 30 Years at 4.5% – $395,552.22
- 30 Years at 5.0% – $447,627.76
By simply reducing the interest rate by 0.5% per annum, this has resulted in a saving of over $50,000 in total interest paid over the life of the loan. This will certainly go a long way in getting rid of your mortgage faster.
Taking this a step further, you could consider reducing your interest rate but maintaining your current repayments. This would mean that you’re repaying the Principal faster than would otherwise, and considering that you’ve managed to do so already, why not continue making the same repayments and get yourself out of debt faster. This acts in a similar fashion to simply rounding up your regular repayments. For example, if your weekly minimum repayment is $562, consider rounding it up to $600, or even $570 if $600 is too much of a stretch for you.
4. Set a Target Goal to be Debt-Free
This may sound like a simple and obvious approach, but it’s amazing how often we overlook the obvious. By setting realistic and achievable goals when it comes to our home loan, we have something to work for and feel great about when we get there. For example, if you want to be debt-free by your 60th birthday or your retirement date, consider how much extra you need to pay off your home loan each week, and act on it right away. If you’re so inclined, you could even set milestones along the way and celebrate if you’re on track to achieving your milestone of being debt-free.
Of course, consider if these home loan strategies are right for you and ensure that your finances are healthy overall.
LoanSuite Pty Ltd is your lending partner for all of your home loan, investment property, business and commercial financing needs. With our wide range of lending solutions, expertise in financial planning and investment strategies, and extensive experience in working with both Australian residents and Australian expats, we are your partners for your lending needs.
Book a obligation-free, complimentary consultation here today.
LoanSuite Pty Ltd is an Authorised Credit Representative (Credit Representative Number – 494608) of My Local Broker (Australian Credit License – 481374). Important Disclaimer: Your complete financial situation will need to be assessed before acceptance of any proposal or product.