Looking to pay off your mortgage faster? With rising interest rates, making small tweaks like switching to fortnightly payments, adding extra repayments, or utilising an offset account can significantly reduce your interest and loan term. Follow this simple guide and potentially save thousands, paying off your mortgage in under 10 years!
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With interest rates increasing, what are some quick and easy fixes you can make to your current loan structure to be able to go and pay it off quicker, so pay off debt faster?
If you're interested in knowing what my strategy looks like when it comes to debt, then definitely keep reading.
When it comes to paying off debt faster, yes, you could just go out there and say, "Hey look, every time we've got some extra cash, I'm just going to put it into my loan and pay it off quicker."
However, if you had an actual strategy to reduce your debt quicker, you'd actually get there and be more effective than if you were just doing it whenever, wherever.
Why?
It is because:
That's become fairly evident over the last couple of years.
If you sit on the sidelines thinking: I'm going to invest, I'm going to invest, and you've never actually got the chance to invest because you didn't have structured plans in place, it means that you fall further behind.
As a result, you might be going: Hey, I can just pay off a little bit extra this month because I have some extra cash left over.
Okay…That's great, it's better than doing nothing.
However, chances are you'll be lenient on yourself the next month, the following month, and the month after that, then suddenly, you're not paying off extra at all.
So here are just a couple of quick things to look at, and I wanted to break it down with actual numbers so that you can see the actual difference something like this could make for you.
Most commonly, people are paying a monthly repayment, but if you just switch that from monthly to fortnightly or weekly, then it could make a massive difference.
What we'll see here is in the calculator, which shows you the following:
If you make a monthly repayment, it would be about $4,496, and your total interest over the life of the loan will be $868,786.
Now, if you went to fortnightly, it should be roughly about half, and that would then be $2,248, but now the total interest drops to $682,696, so an interest saving of about $186,000.
Once you go weekly, the difference between weekly and fortnightly is not so great—you’re saving only a couple hundred bucks there.
I think that's more of a nuisance, especially if you're getting paid fortnightly.
If you get paid weekly, then yes, you could go down that path and just pay a weekly repayment, and that's stock standard for you.
However, if you're getting paid fortnightly and you're actually only paying monthly, it means that you're making one repayment, which is 12 times a year but, if you were to go fortnightly, that's twice as many—now you're making 24 payments, and we know interest is calculated daily.
Therefore, as that balance reduces more frequently, you should, in effect, pay a lot less interest over the life of the loan.
Now, I'm going to start combining a few of these tactics to really see what the value could look like for yourself.
Over here, we've got extra repayments.
As I said, if you went in and said: I'm going to make some extra repayments, and it might be $100 here or $200 there—I would be saying commit to it.
What I'm saying is if you have savings that you're making every month, and say you save as a household $800 a month, then maybe you look at allocating $500 towards debt, and If this is something that keeps you up at night, your savings aren't going to help.
Yes, it's good to have an emergency fund, which is why you're not putting in all $800, but you might decide: I'm going to put in a larger portion, like 500 bucks a month, and then we can see what the difference looks like.
So again, same example—$750,000, 30-year loan term, and 6% interest rate. You're paying this off monthly, and your extra repayments monthly are about $500.
So your current repayment would have been $4,496, like the previous example, but now it's updated by 500 bucks, so almost $5,000 a month.
Now, the interest savings that you would have over that period of time would be $227,936, and you would save about six years off the life of your loan.
If you're someone that's 40 and you want to retire at 65, then you want to go: How do I pay off my 30-year mortgage in 25 years?, A quick-fire way to do that would just be: to allocate an extra amount towards that monthly repayment.
I think you can see where the flow-on from here is: how do we go and make more frequent payments with the additional payments?
Let’s see what the actual effect of that looks like:
So when you go ahead and combine it, we've changed from a monthly repayment to a fortnightly repayment frequency, and we've still kept the $500 a month, but in this case, because we're doing fortnightly payments, we've just halved that to $250 a fortnight.
The results are: Your fortnightly repayments are about $2,324, but here is the big kicker—your interest that you're saving is about $241,564, and the time that you've saved is actually seven years.
So just by making these two couple of tweaks, you can see such a massive difference. You're saving potentially anywhere between five and seven years by making small changes.
Now, of course, this doesn't apply to everyone.
You might be in a situation where you've already got 15 years of the loan left, so the numbers will differ, but I think it's very important for you to see the actual effect of this and how it compounds over time.
This is very similar to when you're actually building wealth because when you go out and you purchase property, you're like: Okay, well I've got one, and then it suddenly does some stuff, or it's growing at 4%, which is fine, but I'm sort of getting lazy, and I don't really like my job.
You get to work on Monday, and you're like: Has my property gone up in value? Can I retire yet?
Well, that's the wrong way to approach it.
What you want to do is be in the market for a longer period of time and allow that compounding gain to work out.
So what’s something you actually do then?
Simple. It is to figure out:
You also need to go in with a conservative compounding growth rate of, like, say 5% and see what that number looks like after 30 years.
If you're not happy with it—and again, you've got to account for inflation, so although that number looks massive today, it might mean nothing in 30 years’ time—if you're not happy with that, then reverse engineer it and say: Okay, if I'm not happy with X amount, I need to go and put more effort in now in order for me to have more choices later in my life.
If you had the same opportunity now when you're 35 versus when you're 65, I'm pretty sure at 65 you're going to want to be chilling out versus at 35 when you're definitely healthier at 35 than you are at 65.
Now, you might be strapped at the moment where everything that you're making is pretty much going towards your expenses and can't actually afford to pay the extra repayment.
According to Philip Lowe, he doesn't really give a sh*t, but fortunately for you, you're here reading this article, so you care about your finances, and I do as well.
Now, another small but very effective method of paying down your loan quicker is actually not paying it down quicker; it's actually just having an offset account.
Now, what I've got here is the same example:
I've left the repayment frequency to monthly, but all I've done is added $20,000 into my offset account.
Traditionally, when you get a loan done, you are basically saying: I'm going to have an offset account, or I’ll just have a normal account
Most brokers will set you up with an offset account because it helps you anyway.
However, you might have to pay a little bit extra in terms of the interest rate, depending on what loan product you actually get. (I'm not a mortgage broker, so definitely go chat with someone who's professional in that space because they'll be able to help you navigate different products and financial tools that you can actually use for yourself.)
What an offset account basically does is: let's say you've got $750,000 worth of debt.
You go ahead and say: Well, in my savings or offset account, I've got $20,000.
The bank calculates interest on the original amount minus what's in the offset account.
The logic behind it is, the bank says: Well, you've got the savings there, so if you really wanted to, you could go ahead and make that repayment of $20,000 towards that mortgage. So, you know what? We're going to reward you. By having money in there, we're only going to calculate your interest daily on the amount minus your offset account.
With that, how much of a difference does it actually make?
Now here, if your monthly repayment is the exact same—$4,960—the interest saved will be $93,320, and the time you've saved is one year and eight months.
Now, it doesn't sound like a lot, but when you're at that age and you're like: I really want to retire now, a year and eight months being at a job you don't like is going to mean the world to you.
This is why simply just having $20,000 in your offset account can make a huge difference.
Now, what happens if the offset balance is $100,000? Would that make a huge difference?
Well, the same example here actually saves you interest of $362,171, and it saves you about six years. So, you can see how a combination of having an offset account plus making extra repayments plus increasing the frequency of your repayments can actually get you to pay down your loan much, much faster.
I think if you realistically have a plan in place and execute it well, you can pay off your debt in less than 10 years, which sounds absurd because, as we grew up, we saw our families, parents, and people around us say, "I've got a 30-year mortgage. I'm going to be so old when I finally pay this off."
However, it doesn't have to be like that.
We're in 2024, and the idea is to spread this information because more people can benefit from this stuff, especially now when interest rates are so high.
Otherwise, to actually pay off your debt faster, you should be looking at positive cash flow properties.
When it comes to debt, you've got to understand that debt can be used really well for leverage gains if you want to build your wealth. But you should only take on more debt during a time like this when you have emergency buffers in place and the right strategy and team.
That's why, for me personally, I'm not scared of taking on more debt to purchase more properties and build out my portfolio. But at the same time, I'm very strategic about:
You might be someone that's young and thinking: Well, you're telling me I can pay off my debt faster, that's probably what I'm going to do.
In that case, you're only left with one property that doesn't generate you any income because you're probably going to live there, and it's debt-free.
Yes, this gives you a lot of peace of mind, but it doesn't really give you the options for early retirement.
So, if you're interested in building out a portfolio, definitely book a FREE discovery call with my Search Property team.
We help people execute on plans, so it's not just about plans on paper; it's about how you actually execute those.
I hope you guys have learned so much from me in this article. Catch you guys on the next one.
Thanks, guys!
Disclaimer: Search Property Pty Ltd (SP) does not provide financial or investment advice and does not hold a financial services license as defined in the Corporations Act 2001 (Cth). Any advice given by SP is general in nature and does not take into account your personal circumstances or objectives, financial situation or needs.
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