How long does it take to pay off a mortgage?
Typically, when you take out a home loan, you’ll be given 25 to 30 years to pay it off. But that doesn’t mean you have to chip away at it for the whole term.
These five strategies could help you get ahead on your mortgage, which could in turn save you a significant amount of money.
1. Check you’re paying a competitive rate
If you’ve held your mortgage for some time, it could pay to compare different home loan products from different lenders.
Variable home loan interest rates can differ between products on the market, and securing a rate drop could translate to hundreds of thousands of dollars in savings over a loan’s term.
Switching your home loan to access a better rate, terms, or features is called refinancing. And while refinancing can help you keep more money in your pocket, there are a few caveats to be mindful of:
- You’ll likely face upfront fees when refinancing, including discharge fees, application fees, and valuation fees. These typically cost a few hundred dollars—it’s important potential savings on the table outweigh such costs.
- If you’re loan-to-value ratio (LVR) is 80% or higher, you’ll likely need to pay for Lenders Mortgage Insurance (LMI) with your new lender.
- If you’re on a fixed rate home loan, you could incur significant break fees if you refinance during the fixed term.
There’s a significant gap between the highest and lowest home loan rates on Canstar’s database. Compare refinancing home loans to see if a more competitive interest rate is out there for you.
Canstar’s mortgage calculator can show you how much a lower interest rate could help you save.
2. Pay a little extra off your home loan each week
Making extra repayments is a simple way to pay off your home loan faster. And you might not have to pay a lot extra to reap the reward:
On a 25-year, $600,000 home loan with a rate of 6.14% (assuming weekly repayments):
- Paying $1 extra every day—or $7 per week—could see you mortgage-free around five months ahead of schedule and cut your overall interest cost by more than $12,000.
Paying $2 more each day—or $14 per week—could save you nearly $24,000 in interest and cut around 10 months from that 25-year loan term.But before making any extra repayments, keep in mind that:
- Fixed rate home loans typically come with annual repayment caps. If your extra repayments exceed this cap, you may incur fees.
- If you don’t have a redraw facility on your home loan, you won’t be able to withdraw any extra repayments you’ve made.
3. Make lump sum payments into your home loan
If you receive a lump sum of cash, like a tax refund or bonus, funneling it into your mortgage could help you pay off your home loan sooner.
Using a windfall to make a lump sum payment on your home loan could dramatically accelerate a loan reduction because the money comes straight off the loan balance.
On the same $600,000 home loan mentioned earlier (with a 6.14% interest rate), if you use a $2,000 tax refund to make a lump sum repayment in the first year of your mortgage, you could cut up to two months from your loan term and save close to $7,000 in interest. You could consider making it an annual habit to pay lump sums into your loan to supersize your interest savings. However, it pays to check with your lender whether any fees or limits apply first.
4. Make your loan repayments weekly or fortnightly
If making extra repayments isn’t an option, you could try paying weekly or fortnightly instead of monthly.
Rather than making repayments monthly, you could aim to pay a quarter of your repayment each week or half your regular repayment each fortnight. Over the course of a year, you’ll make 26 repayments.
That’s equal to 13 regular monthly payments, instead of the 12 monthly repayments your lender will typically ask for.
If you’d prefer not to keep track of out-of-cycle repayments, you can reach out to your lender and ask it to adjust your payment schedule and increase their frequency.
Do note that repayment caps may still apply if you’re on a fixed rate home loan, and an extra month’s worth of repayments could contribute to reaching this cap.
5. Consider a home loan offset account
A home loan offset account acts like a savings or transaction account attached to your home loan. But, instead of paying you interest, the savings in an offset account are deducted from your home loan balance when interest is calculated.
As an example, if you have a home loan of $400,000 and savings of $20,000 in a 100% offset account, the interest you pay will be as if you have a loan of $380,000.
While this won’t reduce the size of your repayments, more of each payment will go towards paying down your loan principal, helping you pay off your home loan sooner. Meanwhile, your spare cash is easily accessible.
You can achieve a similar result if your home loan provider offers a redraw facility, though there may be fees or processing delays that apply when accessing the money.
However, some home loan packages that include offset accounts or redraw facilities may charge higher fees or rates. It’s a good idea to weigh the value offered against any extra cost when comparing.
You can take the first step by comparing home loans with offset accounts or redraw facilities on Canstar’s panel of lenders.
Should I pay off my home loan early?
There are a lot of reasons paying off your home loan sooner can be a positive move. Paying off your mortgage faster could allow you to:
- Pay less interest: The more you pay down the balance of your home loan, the less you could pay in interest over the long term, leaving more cash in your pocket.
- Build equity faster: The more you pay down the balance of your home loan, the more equity you may have in your property. You can then borrow against this equity to meet other financial goals, like funding a renovation or purchasing an investment property.
- Be free of debt: Paying off your mortgage faster can allow you to own your place outright sooner, and for many, there are few better feelings
