Purchasing a home is likely the biggest investment you’ll ever make. It will probably also be the best investment you make in your lifetime: allowing you to raise your family in your dream home, while gaining a foothold in the lucrative investment market. However, for most buying a house also involves taking on a large amount of debt for up to 25 years.
It is possible to pay off your home loan in a much shorter amount of time – even as little as 10 short years – and enjoy the financial freedom of outright home ownership! Here are tips and advice from the experts to allow you to do just that.
Make a considered decision on setting your price bracket
Before anything else, paying off your mortgage comes down to how big your loan is in the first place. This means that when you decide on how much you can afford to borrow (and therefore what kind of house you can afford to buy), be sure to be sensible about what mortgage is right for you. Just because banks and lenders are willing to lend you a certain amount of money, doesn’t mean you should take it. In order to pay off your mortgage sooner it is important to make as many additional payments as possible, but this will be practically impossible if your loan is so large that you struggle to make the minimum repayments every month.
Before deciding on the price bracket of the home you can afford, do a comprehensive analysis of your budget. How much is your total monthly income, including extras such as bonuses and dividends? What are your regular living expenses, including everything you will spend money on? Be realistic. Subtract your monthly expenses from your monthly income to determine your maximum monthly mortgage repayment. If you are struggling to find your dream home in your price bracket, it may be time to reconsider location and house size – do you really need to be close to the CBD or have that extra bedroom?
Then set a goal for how soon you want to pay off your mortgage, whether it is 5 years, 10 years or something else. From there you will be able to calculate how much you can borrow in order to pay off your mortgage in that time frame.
Pay off and consolidate other debts
Another part of the preparation phase is addressing all your other debts before you take on a mortgage. It is important to pay as much of your personal loans, credit card balances and any other debt you may have before taking out a mortgage.
Good financial practice is to pay off “expensive” debt, that is debt with the highest interest rates and fees, first. Generally, credit cards and personal loans incur significantly higher interest than your large mortgage, so these should be attacked as a priority.
Or even better, if possible you should consolidate all of your debt in one place, usually meaning bringing your personal loans etc under your home loan. This means you will pay the lower interest rate on everything, and so will pay less over the total life of the loan.
Make bigger payments, more often
It may be obvious, but it is worth pointing out: in order to pay off your mortgage faster, you need to pay more than the minimum payments, on a regular basis. There are a few tricks to make it easier to do this.
Firstly, make it your standard practice to pay above the minimum amount every month. You can calculate how much you need to pay in order to pay off your mortgage in your goal amount of time using the method described above. You may also find it easier to make fortnightly, or even weekly payments which add up to this amount, rather than monthly, which can be less stretch when paying this in smaller chunks. This also means over the whole year you will end up making the equivalent of one extra monthly payment, as there are 26 fortnights in a year but only 12 calendar months.
Finally, anytime you come into any extra money, big or small, put this straight into your mortgage. Tax refund time? Pay it straight into your home loan? Bonus from work or birthday cheque from Grandma? Likewise. Before you do any of this however, you will need to check with your lender as to their rules on making additional payments, so make sure you ask about this when investigating loan options in the first place.
All of this will help you to hit the principal part of the loan as soon as possible, rather than only paying off the interest. The reason many people take 20, 25 or even 30 years to pay off their mortgage is that they spend the first years paying only interest while the principal remains untouched, and keeps generating more interest. In this way, you will end up paying much more overall across the total life of your loan.
Cut out luxuries you don’t need
If paying off your mortgage sooner is a priority, take a hard look at your expenses and see which luxuries you can cut out in order to put that money toward your home loan. A good start is to make a spending record of every cent you fork out – you will be surprised by how much you spend on unnecessary items like take away coffees, parking fees and eating out.
By setting up frugal measures such as eating at home more, catching public transport and cutting back on indulgences, you can save a significant amount of money which can go straight into extra mortgage repayments. Some of these may be a challenge, but consider them short-term hardships: after all, once you have paid off your mortgage you will have your entire income to spend on luxuries, holidays and whatever you wish!
A great way to bring in some extra income can be to rent out space in your house. If you go away on holiday, rent your home out on Airbnb. If you have a spare room, consider renting it out – this will not only bring in cash which you put towards extra mortgage repayments, but your new lodger will help share utilities and internet bills. If you don’t have a spare room (or don’t like the idea of a housemate) you may be able to even rent out your garage as parking space depending on your home’s location.
Don’t settle for your mortgage once you have it, always be on the look out for a better deal! The market is constantly changing, so continuously check for loans offering better interest rates or otherwise better terms and conditions. Most mortgages have the option to refinance, which could mean paying your loan off much quicker if you find a better deal.
Sometimes you won’t even need to go ahead and refinance in order to get the better deal: if you call your lender and tell them you are considering refinancing with someone else they will often offer you a better rate with them.