How to save thousands by paying off your mortgage faster

Save a larger deposit 

Making a larger down payment at the very beginning of your home loan journey can reduce your loan balance. 

Lenders perceive borrowers who contribute at least 20% of the property value to be less risky, according to HSBC Bank. At the same time, those with a loan-to-value ratio (LVR) below 80% often secure lower interest rates. 

Increasing your deposit can help you avoid paying Lender’s Mortgage Insurance (LMI), which is usually required when you have a deposit less than 20% of the property’s value. 

Make a budget 

It sounds simple enough, but not giving every dollar you earn in your salary a specific job can mean you end up wasting money. 

By understanding your personal budget, you can take control of your mortgage repayments, explains New South Wales-based Mortgage Choice broker Kelly Carter. 

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“Many people spend first and then save, only making the minimum repayments on their liabilities. However, if you set a realistic budget that covers your living expenses, simple luxuries and savings for other important goals, you can then allocate the remaining income to your home loan," Carter says. 

"Once you know this number, pay that amount to your loan first, then save, and spend what’s left."

Bucket your income 

Using multiple offset accounts to separate savings into buckets based on different financial goals is a great way not to overspend. 

“My offset accounts include categories like emergency fund, travel, bills and general spending. While I’m building up savings in these accounts, the money is 100% offsetting my home loan balance, which helps reduce the interest charged,” Carter says. 

Combined with paying more than the minimum required home loan repayment, this is a powerful way to reduce your debt faster, she says.

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Switch to fortnightly repayments 

If you’re still making monthly repayments, think about switching to fortnightly instead. Paying half of your monthly payment every two weeks adds up to making one extra mortgage repayment every year. 

This is because there are 26 fortnights in a year, and 12 months, so you will be making additional payments over the course of a year. 

If your mortgage repayment is $2500 a month, you will make 12 payments, adding up to $30,000 a year. By switching to fortnightly repayments, you will be making payments of $1250 per fortnight, which adds up to $31,250 per year. 

Check if your lender will allow you to switch payments to fortnightly, because some lenders won’t. But it’s worth asking if you are able to afford the extra repayments out of your household budget. 

Use the features on offer

Your mortgage may come with features that, when used as intended, can save you money. For example, an offset account linked to your home loan can be used to receive your salary and paying bills, which ‘offsets’ your home loan balance daily.

'Offset accounts explained': youtube.com/mortgagechoice

The more you have in your offset account, the less interest you will pay on your home loan repayments. 

Some lenders also offer a redraw facility, which allows you to make extra payments to your home loan to reduce your loan, and therefore the interest you will pay on your loan. 

This facility also allows you to redraw any extra funds you’ve paid into the loan, which can be a good option if you don’t want to commit to higher mortgage payments. Just check if your lender is charging a fee each time you redraw money, because this can add up pretty quickly. 

Make extra payments 

If you find yourself with extra cash somewhere along the line, don’t waste it. Get into the habit of putting extra funds that come your way straight onto your home loan. 

Whether it’s a bonus from work, a pay rise, money from family, a rebate, tax return or an inheritance, using that spare cash wisely can help you pay off your mortgage faster. Again, check with your lender to see if you would be penalised for making extra payments when you can by being charged a fee. 

'Myths about fixed rate home loans': youtube.com/mortgagechoice

Also consider rounding up your mortgage repayments. So if your repayment is $1300 per fortnight, why not round that up to $1500, or even $1600 if you can afford to.

Don’t pay loyalty tax

Making sure you’re getting the very best interest rate in the market by shopping around among lenders for the best possible deal can shave thousands off your mortgage repayments every year. 

As the banks drop their interest rates over this year as the Reserve Bank of Australia lowers the cash rate, it’s important to do your due diligence, because not all lenders will pass on the interest rate cut. 

Boost your income 

There are so many ways to make extra income these days. From renting out a spare room or your garage space to picking up an extra job, you can make hundreds more a week if you put your mind to it. 

Also make sure you are improving your skills over time so you can boost your income, which you can also use to put towards your mortgage repayments.