5 tips on how to pay off your home loan quickly

Imagine the feeling when you make that final mortgage payment to your bank and you are debt free, there is a feeling of freedom in it.

When I first bought my first house, I remember when the bank manager said that the loan contract is 25 years, I didn’t really think about it, I was just happy to get a loan and have my own place. After 4 months I realised the monthly repayments were only covering the interest and barely any of the principal was being repaid. After doing some numbers, I found that staying the full 25 years, I would have paid nearly 3 times the initial purchase price. Wow.

So my wife and I decided to stuff the bank and pay it off faster with short term sacrifices of dining out and movies, among others, for long term gain of being mortgage free. We put in place a plan and we paid it off in 3.5 years. It was tough but worth it.

Here are 5 steps on how to pay off your mortgage faster.

Do a budget:

One of the key success of becoming debt free is to know your budget and which black hole your hard earn money is disappearing into. You will find out what a ‘Luxury’ is and what is a ‘Need’. Cutting down on luxury expenses can make a big difference.

 

Have a plan and stick to it:

Having a plan helps remind yourself that this period of your life living on a tight budget is not forever. Have a long term plan with short-term goals, like a 3-year goal to pay a $30,000 off the mortgage and a long-term plan of 15 years to fully pay off your mortgage. Remember to also have family holidays/rewards (low cost) when you achieve your goals, otherwise, it would be very hard to achieve your long term plan.

 

Use a 100% Offset account and pay extra:

There is no magic bullet, it all comes down to paying extra than just the minimum payment. We decided to put all my wife’s income into the mortgage, however, we had no kids at the time. Working out from your own budget how much extra you can put into the mortgage.

A 100% offset account works when you have a bank account linked to your loan. If you deposit $100 into the offset account, the funds offset the same amount in the loan and is not charged interest. The offset account can also be used as an emergency or family holiday account and you will not find a bank that will give you a higher interest rate in a saving account than the interest rate on your mortgage.

Example: If you have a loan of $300,000 with an interest rate of 5% and you save $100,000 in the offset account over a few years. You would have saved $5,000 of interest, this is equivalent to earning an extra $8,000 in salary before tax, or $200,000 in an investment paying a 4% dividend.

 

Reduce your non-essentials:

When you add up your luxury expenses, the amount may surprise you. Items like entertainment, the latest must-have technology, a new car, LCD TV, multiple phone and iPad plans, Alcohol, Foxtel , take away or dinning out can quickly eat into any household budget.

In my job I have seen luxury expenses add up to $800 per month and one client was quite devastated when they realised they spent over $260 a month buying coffee on the way to work.

 

Use cash, not credit cards:

If you don’t have the cash to buy it, then don’t buy it. Don’t get sucked into the buy, now, pay later promotions because the interest from the free periods (19% to 23%) is added back on to the loan amount if you miss just 1 payment or don’t pay the debt off in time. This also forms bad habits of buying things you don’t really need with money you don’t have.

Good luck, I hope some of this information helps.

Arthur Tantiprasut is Business Manager with Quantum Accountants