Paying off a mortgage can seem impossible when you first get it. But if you chip away at it, month in, month out, you’ll get it under control faster than you could imagine.
Interest is key
Think first about the interest rate. The lower, the better, so shop around. Try to save a 20 per cent deposit, because you can pay less interest if you do.
What kind of mortgage?
The next question is fixed, floating or revolving credit?
• With a fixed mortgage, you’re guaranteed to pay the same interest rate for the fixed period, anything from six months to two years. You’ll know exactly what you’ll pay. Some people love that peace of mind.
• Floating mortgage interest rates go up or down depending on how well the economy is doing. The advantage of a floating mortgage is that you can usually make extra payments when you have more cash. The other advantage is that you can switch without break fees.
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• Or split it. You can split your mortgage between fixed and floating rates. Or you can fix two parts of it across two different fixed periods. This reduces the risk of a sudden payment shock when you come off a fixed mortgage. Mix-and-matching fixed mortgages to add a third small chunk on floating also allows you to make extra payments.
• The other alternative is revolving credit, which is like a mortgage-sized overdraft. When your wages or salary are paid into this account, the outstanding sum of the mortgage is reduced for part of the month, so you pay less interest. Warning: If you’re a spender, step away now. Revolving credit is dangerous. Only born savers should use them.
Tricks to pay your mortgage off faster
• Making extra payments on your mortgage is very effective. Even one coffee at a time adds up to tens or even hundreds of thousands of dollars over the life of a mortgage. Double check that your lender doesn’t have a minimum sum for extra repayments.
• Pay fortnightly, not monthly. Divide your monthly mortgage payment by two, then pay that sum fortnightly. That way, you’ll make one extra payment a year, because there are 26 fortnights in a year, rather than 24.
• Round your payments up to the nearest $100. The extra money reduces the principal, meaning you pay less interest.
• When you get a pay rise or a bonus, put it straight into your mortgage.
• When your interest rate drops, the bank will drop your payments, but tell them you want to keep making the same repayments. If you keep your monthly payment the same, you can wipe more of the debt faster.
• Shorten your mortgage term. It’s common now to be offered a 30-year mortgage term. But see if you can manage 25, or even 20, years. Making it shorter means you’ll pay way less interest. A mortgage costs more for every extra year it runs.
• If your bank offers it, choose to have your home loan payments increased by a set amount every year on the anniversary of the mortgage.
If you can find ways to earn more and pay those earnings into your mortgage, you’ll win in the long term. Can you ask for a promotion, get an extra job part-time, get a flatmate, rent rooms on Airbnb, or start a part-time business?
Don’t buy that new car and definitely don’t put it on the mortgage. The interest rate may be lower, but you’re paying it for many more years, making you worse off in the long run. Beware of rolling credit card debt into the mortgage.
Diary a date regularly to review your mortgage and look for new savings.
Ask an expert
Consider using a mortgage broker. They get paid by the banks, not you, and can sometimes they can help negotiate a slightly better rate.
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Published September 2018
Story by Diana Clement
We aim to make things about money easy to understand. To help us make this article reader friendly, we used The Write Plain Language Standard.
All content is correct at time of publication date. This article is general in nature only and has not taken into account any particular person’s objectives or circumstances. We recommend you speak with a financial adviser.