Paying off your home loan faster is a common goal that many readers share with me as part of the Kick Start your Wealth Challenge. As someone who is looking to retire early, owning a place mortgage free is high up there on our families list of goals.
I know there is a school of thought that it would actually be better to invest surplus funds and not pay down the mortgage.
The thinking is that your mortgage is only costing you say 4.5%p.a in interest. If you invest instead in the share market or an index fund that generates returns of say 9%p.a you come out ahead.
Whilst the math makes sense, it is not the approach that we have chosen. Since having kids the security of a paid off home is appealing to us.
It will mean that the level of passive income we need to live off for our investments is much less than when we need to service a home loan as well.
If you have an emergency fund and have removed all your consumer high rate debt, then paying down your mortgage can be a great next goal.
14 tips to pay off your mortgage faster
Add cash windfalls
Bonuses at work, tax refunds, inheritance or any other windfalls are all great ways to make a dent in your mortgage. If you do online surveys or use cashback websites you could channel this money to your mortgage too.
Round up your payments
If your repayment is an odd amount, it could be a good idea to round it up to the nearest ten, fifty or even hundred dollars. You will soon become accustomed to the rounded amount, and the extra dollars can take thousands off your loan.
Make repayments more frequently
If your repayments are due monthly, you could try paying the loan back fortnightly or weekly instead.
Paying fortnightly just means that you will end up making an extra monthly payment each year, without noticing it too much.
Don’t reduce your repayments
If there is a time when your interest rates go down, it can be wise to keep your repayment at the higher level.
Not only will this save you interest on your loan, if rates head north again you are already sitting in a comfortable position to be able to keep up with the repayments.
If you ring up your bank as per the point above you will likely get a reduced discount. In some cases, however, it can be worthwhile refinancing altogether to get an even better deal.
I always use a trusted mortgage broker that I have worked with over the past six years or so to help us refinance any of our loans.
But sometimes it can be tricky to know how to find the right broker that suits your needs.
It costs you nothing to see a broker, so if the first one you meet doesn’t feel right for you then it is worth looking for another one until you find one you gel with.
Use a 100% offset account
With most loans these days you can attach an offset account. Make sure you get one that is a 100% offset account.
This means that any money you have sitting in this account will help to reduce the interest you pay on your loan.
We put all of our funds in our offset account. If you like to have separate accounts for bills, long-term savings etc then some lenders will let you have multiple offset accounts linked to the one loan. It is worth checking with your lender if they offer this service
Don’t let honeymoon and welcome rates fool you
Just like how the banks offer an intro offer on savings accounts to get you to put your money with them. Banks do this with home loans as well.
Offer what sounds like a really great deal, but often after a year or so the rate reverts to a far less competitive interest rate.
They know that most people don’t tend to move the loans that often so they use this as a marketing tactic. There is also sometimes a clause with how long you have to keep the loan with them after the honeymoon rate ends.
When I have done comparisons for myself in the past, intro offer home loan has never worked out best in the long run.
Pay your first installment before it is due
If you have a new loan or have just refinanced, it will be a month before your first repayment is due.
So if when you first get your loan your make a repayment straight away this will go straight towards reducing the principal on your loan.
Consider a dual income property
A great way that we use to help us to pay our mortgage repayments is to have someone help pay them too!
For one of our investment properties, this meant adding a granny flat so that the rent we earn now covers the full repayment as well as any bills for the property.
Even with our current house that we live in, we bought a place where we could rent out part of it and live in another part. It has meant that half of our mortgage each month is being paid by someone else!
Adding a granny flat or renting out part of your house all the time might not appeal to everyone. But you could consider renting out your place when you are on an extended holiday.
Or if you have an area of your house that is separate from the rest, you could use AirBnB on an ongoing basis if it is something you feel comfortable with.
Rent out your garage
This is a similar concept to above, but a bit less intrusive then renting out a room.
This option won’t work for everyone, but if you live close to the city or a working hub parking can be in hot demand.
And if your car is not there all day then make it work for you earning money.
This one is a bit more drastic than the rest. But if you have a really large loan and house then considering moving to a smaller place can help you get a loan that is smaller and therefore quicker to pay off.
You want to make sure you do the sums first that it will make sense for you to do this. As you will incur costs such as stamp duty, moving costs and legal costs to sell and move.
Move to a regional city
The price of buying and maintaining a home in Sydney where we live now is very expensive.
We are considering a move to a regional area. Which will mean if we sell up here then we can buy a place mortgage free.
Opportunities for work have always been a concern for me. It has been the main reason we have not considered a move earlier. But as I learn more about legitimate work from home opportunities I start to see it could be a real possibility for us.