Ways to pay off your home loan faster

Small changes now can mean big differences later to how much of your home loan you end up repaying – and how long it takes.

If you’ve recently had a home loan approved or are already some way into your repayments, you may be thinking about how you can pay it off sooner rather than later. We explore some smart ways to shave interest – and years – off your mortgage.

Note that examples are indicative only, and outcomes assume that interest rates will not change and that all repayments are made on time.

Increase your regular repayment amount

Paying more than your required repayment amount is another way to reach your home ownership goal sooner.

Example

Trevor decides to contribute an additional $386 per month on top of his $2,315 monthly home loan repayment, paying $2,701 each month. Over the course of 12 months he pays $32,412, which is roughly equivalent to two additional months' worth of payments each year.

This will shave six years off Trevor's 25-year loan term as well as around $80,000 in interest.

Original home loan repayment: $27,780/yr x 25 years (@ 4.9% p.a.) = $694,500

Revised home loan repayment: $32,412/yr x 19 years (@ 4.9% p.a.) = $614,948*

* Source: ASIC MoneySmart mortgage calculator.

Make additional lump sum payments

Making additional lump sum payments – especially during the early years of your home loan – can have a profound effect on how much your total home loan repayments will be and the length of time to own your property outright.

Example

Kate’s required monthly repayment amount is $2,485 on a $400,000 loan with a loan term of 25 years. Over the term of the loan she'll pay a total of $29,820 in one year ($2,485 x 12), and over 25 years, Kate will pay $745,500.

Five years into the loan, Kate receives an inheritance of $70,000. Dividing the money, she puts $40,000 into her home loan and $30,000 into her bank account.

Making the lump sum repayment of $40,000 means that instead of paying off her loan after 25 years, she will reduce the loan term by more than three years – assuming her repayments remain the same – and save herself more than $70,000 in interest. The redraw balance will also gradually reduce in line with the loan term.

Set up a mortgage offset account

A mortgage offset account allows you to offset, or reduce, the interest charged on your home loan by letting you pay down the principal loan amount with your savings.

Say you have a home loan balance of $400,000, and you put $20,000 into an offset account. By doing this, you’ll only need to pay interest on a balance of $380,000 ($400,000 - $20,000) rather than $400,000.

The more money you have in an offset account, up to the balance of the loan, the bigger the savings and the faster your loan can be paid off.

This information has been prepared by PHA Financial Services and does not take into account your objectives, financial situation or needs. Before acting on this information you should consider whether it is appropriate to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. The information provided was accurate at the time of publication and changes in circumstances after a document is published may impact on the accuracy of information. Some information may have been collated from various third parties and we make no assertion that the information was originally ours.

Source Commonwealth Bank