How to pay off your mortgage faster

Shave years off your mortgage and save over $250k in interest

How much interest do Australians pay over the life of their mortgage?

The average new home loan in Australia is roughly $550,000 as of September 2023 (according to the Australian Bureau of Statistics). If we assume a 7% per annum interest rate and the typical 30-year home loan term, then Australians will be paying $767,000 in interestover the life of the home loan!

What are the benefits of paying off my mortgage faster?

There are three main benefits to paying off your home mortgage faster:

  1. Saving money on interest, which can add up to over $250k if you’re able to pay off your typical 30-year mortgage in half the normal time
  2. Reducing financial stress as you feel on top of your debts and in control of your finances
  3. Increasing free cash flow once the mortgage is completely paid off

What are the drawbacks of paying off my mortgage faster?

There are four main drawbacks to paying off your home mortgage faster:

  1. Making higher/extra mortgage repayments requires more saving and less spending today, so it may sometimes feel like you’re having to sacrifice your lifestyle or other financial goals. It’s important to be mindful of where you’re making savings to ensure you still have money available to spend on the areas that are important to you.
  2. You may miss out on higher returns from investing those higher/extra repayments elsewhere
  3. Certain home loans may charge fees or penalties for making extra repayments, especially fixed rate home loans
  4. If you decide to close your mortgage early, then it may be harder to access your home equity in the future if required

You need to weigh up the benefits and drawbacks to find your “sweet spot” where you’re getting the benefits of less financial stress without feeling like you’re having to sacrifice a lot to achieve it.

How can I pay off my mortgage faster?

If you’ve decided that you want to pay off your mortgage faster, then read on. There are no magical tricks here. Paying off your mortgage faster comes down to basic maths – you need to reduce the balance faster and/or reduce the cost of the loan (i.e., lower interest rate and lower fees). As such, the main things you can do are:

  1. Make higher repayments each fortnight/month
  2. Make extra repayments using your tax refund and/or work bonus
  3. Keep funds in your offset account to lower the balance outstanding
  4. Avoid using redraws to fund your lifestyle
  5. Find a loan with a lower interest rate and fees

1) Make higher repayments each fortnight/month

When you first start your home loan, your lender will set you up with the minimum repayments required to repay your mortgage over the agreed term, which is typically 25 to 30 years in Australia. If you make any additional payments beyond the minimum repayments, then you will be able to pay off your mortgage faster.

To help you visualise this, let’s imagine we have a couple that have taken out a typical $550,000 home loan with the common 30-year loan term and interest rates hover around 7% during the life of their home loan. Their minimum repayments would be $3,569 per month and if they simply stuck to these minimum repayments, then it’d take them 30-years to be mortgage free. If they wanted to repay their mortgage sooner, then they’d have to make extra repayments each month as per the table below:

Repay loan within X years Extra repayment per month Interest saved
30 years - -
28 years $79 $61,382
26 years $173 $121,526
24 years $289 $180,368
22 years $430 $237,847
20 years $605 $293,904
18 years $826 $348,482
16 years $1,110 $401,527
14 years $1,486 $452,989
12 years $1,997 $502,821
10 years $2,727 $550,983

You might notice that it gets harder and harder to reduce the loan duration as you move down the table. You only need to repay an extra $79 per month to shave the first 2 years off the loan from 30 years to 28 years. However, at the bottom of the table, you need to repay an extra $730 per month (i.e., $2,727 vs $1,997) to shave 2 years off the loan from 12 years to 10 years. That’s over 10 times as much for the same reduction in loan duration!

Some people choose to ask their lender to increase their recurring home loan repayment, while others simply make larger deposits each month/fortnight into their offset account. The result is the same either way in terms of interest saved (assuming you don’t withdraw/redraw it later to spend it). You could even lock-in the higher repayments by shortening your home loan, but this may give you less flexibility if cash gets tight down the line as you might not be able to easily refinance back to lower repayments later.

Just be sure to check with your lender whether any fees / penalties apply for extra repayments (especially if you have a fixed-rate home loan).

Don't get mislead by the fortnightly repayment "hack"

You might hear some people suggest a “hack” of moving from monthly repayments to fortnightly repayments to help you magically pay off your mortgage faster. The idea is that if you’re usually paying say $4,000 per month and you shift to paying half your monthly amount every fortnight instead (i.e., $2,000 per fortnight), then you’ll end up paying off your mortgage sooner.

While it is true, it’s simply because you’re making more repayments each year: $52,000 (26 x $2,000 per fortnight) instead of $48,000 (12 x $4,000 per month) and that money still has to come from spending less on something else – there’s no free money here. You could achieve a similar outcome by simply increasing your existing monthly repayments by $333/month (roughly 8% more).

They might argue that making more frequent repayments also reduces the amount of interest accruing daily on your loan balance. However, this benefit is tiny in comparison to the benefit from the higher repayments. Using the earlier example of the couple with a $550,000 home loan and 7% interest rates, they might save $190k in interest by following this “hack”, but $187k (98%) of that benefit is coming from making higher repayments and only $3k (2%) of that benefit is coming from the more frequent repayments by itself.

If you don’t believe me, check out the CommBank Home Loan Repayment Calculator for yourself and toggle between weekly/fortnightly/monthly repayment frequencies - you’ll see that the total interest charged only changes from $767k to $764k, but an extra repayment of $300 per month makes a huge difference.

2) Make extra repayments each year

If you occasionally make extra repayments in addition to your typical fortnightly / monthly repayments, you can pay off your home loan even faster. While you might not have much leftover for extra repayments most weeks, you might occasionally get a decent tax refund from the Australian Tax Office (ATO), or annual bonus from work, that you could put towards your mortgage.

Use your tax refund to make extra repayments

According to the ATO, the median tax refund in Australia is around $2,500 . If you own your house with a partner and you decide to both use your tax refunds for extra mortgage repayments every year, then you could reduce your typical 30-year home loan term by almost 8 years and save yourself ~$240k in interest over the life of the loan!

Use your work bonus to make extra repayments

Roughly 1-in-3 Australian workers receive a bonus each year with the median bonus around 6-8% of base salary. If you own your house with a partner and one of you is fortunate enough to receive a $4,000 bonus each year that you use to make an extra repayment on your home loan, then you could reduce your typical 30-year home loan term by almost 7 years and save yourself ~$210k in interest over the life of the loan!

What if I do both?

If you do both of the above (i.e., tax refunds and bonuses towards the mortgage), then you could reduce your typical 30-year home loan term by 11 years and save ~$330k in interest in total. This is a pretty massive impact, but you’ll notice that the total impact is less than the sum of the individual impacts and that’s because the benefits of extra repayments reduce as you make more. You get a big bang for your buck on the first extra repayment, then a smaller and smaller benefit on each extra repayment.

Just be sure to check with your lender whether any fees / penalties apply for extra repayments (especially if you have a fixed-rate home loan).

3) Keep funds in your offset account to lower the balance outstanding

Depositing your pay and savings into your mortgage offset account can help reduce interest paid on your mortgage and enable you to pay off your mortgage sooner. Essentially, the bank deducts your offset balance from your loan balance when calculating interest each day.

Research by Westpac indicated that the average account balance for 25-34 year olds was $7,995 and the median was $3,007. This feels believable given you’ll start each fortnightly pay cycle with say $2,500 and you might have a savings account underway for a house reno, holiday, emergency fund, or new car, with a couple thousand in each.

Using the same example as earlier of a couple with a $550,000 loan over 30 years, if they were to keep an average of $10,000 in their offset account throughout the loan, they could save themselves $66k in interest and pay off their mortgage 1 ½ years sooner.

4) Avoid using redraws to fund your lifestyle

If you’re paying down your mortgage faster, then you’ll notice the amount available for redraw from your home loan account (or your offset account balance) growing quite large over time – we’re talking over $100,000 just sitting there. This is where it may start to get tempting and your plans to pay off your mortgage faster can get derailed overnight. For many people, it’s that renovation you’ve been hoping to do, or that overseas holiday you’ve been dreaming about… suddenly you realise you’ve got the money sitting right there to do those things today if you wanted. It’s just one click of the transfer button away.

There’s no judgement here - you simply need to make any decision to redraw consciously. Every dollar you redraw sets you back on your path to being mortgage free, so you need to weigh up what’s more important to you: that renovated kitchen, or achieving your goal of being mortgage free in X years’ time?

Also, remember that the final cost of that redraw may be much higher than the sticker price of the renovation/holiday/whatever as you’re paying interest on that purchase over the next 10+ years. If you redraw $10k for a holiday, you could easily end up repaying $20k due to the interest accrued.

5) Find a loan with a lower interest rate and fees

Avoid paying the “loyalty tax”

Banks often charge existing home loan customers a “loyalty tax” in the form of higher interest rates than they offer to new customers. The banks are relying on customers being ignorant, or too lazy to do something about it, or a bit of both.

Research indicates that the loyalty tax tends to grow over time as the banks realise how much they can gouge you. It starts at +0.3%, then grows to +1.0% if you still haven’t done anything about it 10 years later. The banks must love it as the Australian Financial Review reported that banks are earning $4.5 billion each year from this lack of action! At the individual level, you could wind up paying over $50,000 in extra interest over the life of your loan for no good reason. Think of what you could do with that money.

You can avoid the loyalty tax by shopping around each year, negotiating with your lender, and not assuming your bank will automatically do the right thing by you.

Don’t assume brokers and comparison websites are showing you everything

When shopping around, be sure to check whether the comparison website or mortgage broker you’re using is showing you all the options available. Their business model is largely driven by commissions and their range of products is typically only a portion of the full range. For example, that meerkat from Compare the Market won’t show you home loan products from Bendigo Bank even though they’re one of the top 10 lenders in Australia and often rank competitively on their interest rates. I guess “Compare (most of) the market” doesn’t quite have the same ring to it.

Compare the total cost including interest and fees

When comparing home loan options, it’s important to consider both the interest rate and the fees. You’ll probably hear lenders quoting a “comparison rate”, which is a good idea in theory as it considers both the interest rate and additional fees/charges. However, these comparison rates are calculated based on a $150,000 loan over 25 years, which is a significantly smaller loan amount than most home loans today. This can make the quoted comparison rates misleading as they make loan products with higher fees and lower interest rates look worse (and products with lower fees and higher interest rates look better) than they’d actually be for the majority of people. If you’re using a mortgage broker, simply ask them to show you a comparison of the total cost of each home loan product for your expected loan amount as opposed to the $150,000 default.

Beware of switching costs

If you’re considering changing loans, be sure to check what fees may apply if you decide to switch. For example, you may have to a pay a:

Ask your lender to match it

If you’ve found a better deal, it’s worth asking your current lender if they can match it. It’s less hassle for you and they get to keep a great customer (you). In my experience, they typically don’t offer much if you simply call up to ask for a better deal (“sorry – you’re already on the best rate we can offer you”) unless they’ve really been gouging you for the last couple of years and therefore have room to lower it. However, they seem to be able to suddenly find a better rate once you submit your formal Discharge Authority form to switch to a new lender. I literally got a phone call within one hour of submitting my Discharge Authority form and I rejected their offer out of principle as I found it a disgusting way to treat your customers.

Keen to pay off your mortgage faster?

Just because you’ve signed up to a 30-year home loan, that’s simply the longest possible period for repayment – you don’t have to take that long. If you can find a way to put an extra $500 per month towards your home loan, then you can pay off your mortgage 9 years sooner and save yourself over $250,000 in interest!

If you’re thinking “where the hell am I supposed to find an extra $500 per month?!”, then schedule a free call with us to see what’s possible with support from a financial coach.