Three tricks that can wipe a decade off your home loan’s life

These three moves can combine to shave a decade off the life of your mortgage and tens of thousands of dollars of interest costs.

Taking 10 years off a home loan is a great goal in the quest for financial freedom, and for many borrowers it will require a three-pronged approach.

A new analysis for SMARTdaily by research group Canstar has found a typical borrower can shave between 10 and 16 years off their mortgage by refinancing to a lower rate, using an offset account and making extra contributions.

It found for a typical $500,000 30-year home loan:

• Switching from an average variable rate of 3.14 per cent to a low rate of 1.89 per cent one year into the mortgage could save $139,000 in interest and five years and four months of time.

• Paying an extra $200 a month into the mortgage could knock three years and nine months of a mortgage’s life, plus cut $37,000 of interest.

• Keeping $20,000 sitting in an offset could save $28,000 of interest and wipe one year and one month off the loan term.

More than 16 years could be cut off the mortgage if borrowers make bigger extra contributions each month of $500 and hold $50,000 in an offset account, Canstar found.

Mardy Chiah uses an offset account to repay his home loan faster. Picture: Sarah Matray

“Repaying your home loan early can clear both your head space and budget capacity for starting a serious wealth creation push, and doesn’t have to come with a lot of pain,” says Canstar group executive financial services Steve Mickenbecker.

“Putting your income and savings into an offset account doesn’t cut your monthly home loan repayment, but it does mean that more of the repayment is directed to reducing the loan balance, knocking off the loan earlier,” he says.

“The effective offset interest rate is way above that of savings accounts, and if you end up needing the money, it is still accessible.”

Mardy Chiah, 31, bought his first home two years ago and has plans to pay off his mortgage early.

“I know it’s not going to be in the next five or 10 years, but hopefully I will enjoy that financial freedom,” he says.

Chiah has been using an offset account to save interest and watches his spending.

“Even though I might enjoy the money more now, in the long run I feel the future me will appreciate me now,” he says.

ME general manager John Powell says borrowers can also save interest by switching their repayment frequency from monthly to fortnightly.

“There are 12 months in a year versus 26 fortnights, effectively squeezing in an extra month of repayments each year,” he says.

“Contribute lump sums like a tax return, work bonus, inheritance or dividend payment when possible as these could drastically decrease the cost and lifespan of your home loan. If you get a pay rise each year, increase your loan by the amount your pay goes up.”

Loans.com.au managing director Marie Mortimer says savings account interest rates are at record lows so it makes sense to pay spare money off your mortgage.

“It may be wise to chat to your lender to see if they offer an offset sub-account which allows you to minimise your interest payments and reduce your principal,” she says.

“Pay more than your minimum repayment if you can afford to do so – this will help you pay off your loan sooner.”

Loans.com.au managing director Marie Mortimer says make extra repayments when possible.

THESE TIPS CAN HELP, TOO

• Set a goal to repay your mortgage off five, 10 or 15 years early, and use free online calculators to work out what’s required.

• Do a spending stocktake to find spare cash for the mortgage – every dollar helps.

• Have extra repayments automatically transferred from your bank account to your mortgage each payday.

• Try to round up your mortgage repayments to the next $100 round figure.

• If you come into extra cash, avoid splurging and instead pump the lump sum off your home loan.

• If you are disciplined, take advantage of interest-free periods on credit cards by putting household spending on the card then leaving the repayment money in an offset account until the interest-free period ends.