Australians are in a rush to pay off their home loans, with almost nine out of 10 mortgage holders trying to get out of debt sooner, according to new research from finder.com.au.
The finder.com.au survey of 2,005 Australians found 89% of borrowers have tried to pay down their mortgage sooner, with the majority (60%) of homeowners opting to make extra repayments.
More than one in three borrowers (40%) commit to making more frequent payments either fortnightly or weekly, instead of monthly.
Rounding out the top three ways borrowers fast-track their home loan repayments is using a linked offset account, with 34% opting for this strategy.
Women are marginally more likely (90%) than men (88%) to pay down their mortgage faster, while Baby Boomers (18%) are twice as likely as Generation X (9%) to have never tried paying off their mortgage faster.
Bessie Hassan, Money Expert at finder.com.au, says borrowers felt burdened by carrying around a mortgage for thirty years and were going to great lengths to break free sooner.
“Some borrowers feel burdened by the thought that they could be paying off their mortgage in twenty or thirty years time if they only pay back the minimum each month – so they’re actively looking for ways to lower their balances,” she says.
Ms Hassan says it’s promising that borrowers have bought within their means and are taking initiative by getting ahead on their mortgage debt.
“Fast-tracking your mortgage repayments could save you thousands of dollars in interest over the life of a loan, and a good way to do this is to make more frequent periodic repayments.
“If you had a $367,600 mortgage (the average national loan size) at 4.73% interest (the average standard variable rate) your monthly repayments would be $1,913.15 and total cost of the loan would be $688,732.79.
However, if you switched to fortnightly repayments of $956.57, you would save $56,654.18 in interest and you would reduce your loan term by four years and seven months, as you end up making one additional repayment each year.
“However, it needs to become a habit not just a once off contribution, as consistency is key,” she says.
Other tactics employed by savvy homeowners included negotiating a cheaper interest rate with an existing lender (5%) and refinancing to a new lender that offers a lower rate or other money-savings features (5%).
“This could lead to huge potential savings for borrowers looking to lower costs and sink savings back into the mortgage to increase equity.”
Ms Hassan says it’s important borrowers have an emergency fund of at least three to six months of living expenses before putting extra funds towards their home loan.
“If you lose your job or get sick and all your savings are tied up in your home loan, you could struggle financially.
“Decrease your risk by having an emergency fund set aside for the unexpected, so you can confidently make extra payments on your home loan and not worry about needing that money in the future,” she says.
Top 5 ways Aussies pay off mortgage faster
- Additional repayments. Making extra repayments on your home loan is a smart way to minimise your interest payable and reduce your loan term. Use an online calculator to see how much you could pocket by making overpayments on your mortgage.
- Go fortnightly instead of monthly. Many home loan customers opt for monthly repayments by default, but making more regular repayments on a weekly or fortnightly basis could lead to significant savings. However, before going down this path, check to see how your lender calculates interest.
- Use an offset account. Similar to a transaction account, an offset account effectively reduces or ‘offsets’ the interest on your home loan by the amount held in the account. For instance, if you had a 100% offset account with $40,000, on a home loan of $500,000, you would see interest-only calculated on a balance of $460,000 instead of $500,000. Use an offset calculator to see how much you could save.
- Round up mortgage repayments. In the same vein as making additional repayments, you can service your debt faster by rounding up your periodic repayments. For example, if your monthly repayment is $1,564 you may want to round up this figure to $1,570 or even $1,580 – you’d be surprised at how far a small amount can go if you do this regularly.
Negotiate a lower interest rate.
In a low rate setting, there are many competitive offers in the market and negotiating a lower interest rate is another way to save on your home loan.
If you’re negotiating a better rate with your existing lender, use your customer loyalty or your repayment history to your advantage – most banks will want to keep your business and will be willing to issue a rate discount.
If your bank isn’t willing to budge, consider refinancing to a lender that provides more competitive interest and suitable features.