How to pay off your mortgage in under 10 years

How to pay off your mortgage in under 10 years

The dream of owning your own home outright and mortgage-free might seem like a long way off for many first-home buyers, but the reality is that it might not have to be.

If you are smart with the way you manage your money, you can quickly cut off decades of mortgage payments and in the process save yourself thousands of dollars.

Here are some ways you can do it.

Increase Your Repayments

Increasing your mortgage repayments can drastically reduce the amount of interest paid and shorten the loan term significantly. 

For instance, if you have a $500,000 mortgage at a 7% interest rate, increasing your weekly repayments from $767 to $1,338 can save you approximately $500,000 in interest and pay off your mortgage 20 years early. 

To implement this strategy, simply contact your bank and arrange to increase your repayments. You can do this either by setting up higher monthly payments or by making additional payments whenever possible. 

While this approach is good in theory, most people don’t have access to an extra $500 per week to put into their home loan. Fortunately, there are some other options.

Adjust Repayments with Income Increases

Another effective strategy is to adjust your mortgage repayments in line with your income increases. 

This method gradually reduces the loan term and interest without requiring a large immediate increase in payments. For example, if your initial repayment is $767 per week and you receive a 4% pay rise, increase your repayment by the same percentage each year. 

Following this approach can save you around $308,000 in interest and shorten the mortgage term by 14 years. Each time you get a raise, allocate a portion of that increase to your mortgage repayment. 

This boosts your growing income to pay off your debt faster without feeling a significant strain on your finances.

Maintain High Repayments

Maintaining high repayments when interest rates drop allows you to benefit from lower rates by paying off your mortgage faster without increasing your payments.

If interest rates decrease from 7% to 6%, keeping your repayment amount at the higher rate can pay off your mortgage six years earlier and save you around $250,000 in interest. When interest rates go down, it might be tempting to reduce your repayment amounts, but by resisting this urge and maintaining higher repayments, you can significantly accelerate your mortgage payoff.

Using Offset Accounts

Using offset accounts can effectively reduce the interest you pay by lowering the effective balance on which interest is calculated. 

For example, you can set up a portion of your mortgage with an offset account and deposit your income into this account. While the money is in the account, it reduces the balance on which interest is charged, saving you money. You can withdraw funds as needed for expenses, maintaining flexibility. 

To implement this, allocate a portion of your savings or monthly income to an offset account linked to your mortgage. Regularly transferring any surplus funds into this account can reduce your interest charges. 

Additionally, you can also make a lump sum payment towards the principal once a year using the accumulated funds in this account, further accelerating your mortgage payoff.

Increasing Frequency

Switching to bi-weekly payments instead of monthly ones results in 26 payments per year, equivalent to 13 monthly payments. This simple adjustment can help reduce the loan term and save on interest. 

Additionally, whenever you receive a windfall, such as a tax refund or a bonus, use it to make lump sum payments towards your mortgage principal. This can make a significant dent in your mortgage balance.

Lastly, be sure to regularly review your mortgage terms and consider refinancing if you can secure a lower interest rate or better terms. This can reduce your overall interest payments and shorten your loan term and save you a lot of money if you are able to maintain your current level of mortgage repayments.

Are you currently in the market for a new property? Get a clear understanding of how much that property might be worth with our free property report.


No Comments

Post A Comment