How to Reduce Your Home Mortgage to 10 years or less

You can increase your payments by keeping them the same, if there has been an interest rate fall. Effectively you will pay off more interest quickly and start reducing the capital at a faster rate. But this is unlikely to reduce the time to pay off your mortgage by one-third or one-half.

Another way is to make more frequent payments. Pay fortnightly instead of monthly. There are 26 fortnights in a year, but only 12 months, so if you pay half each fortnight the amount you are now paying monthly, you will come out ahead. This is likely to take off around 7 years of your home loan.

The best way to pay your loan off faster is to make extra payments more often. If you get a pay rise then increase the amount of your payments proportionally. Starting early in the loan is the key. Extra payments in the first 8 years can dramatically cut the life of your loan, providing you with a better ‘return’ than most investments, particularly if you take into account the tax you have to pay on those investment returns.

You should check that your loan allows you to make extra payments, and if there are fees for doing so. Fixed rate home loans may not allow extra payments, but if they do, may limit the amount you can repay over the life of the loan. You should also find out if there are any fees for paying the loan off early.

If you are penalized under your current loan you may want to consider refinancing. But before doing so you should familiarize yourself with any termination fees for exiting your loan early. These may be high, especially for loans with a fixed rate. You will also be liable for the lender’s legal fees to discharge your mortgage. Fees and charges also apply to the new loan.

To avoid these fees, you can ask your current lender to refinance you with a better loan. This may cut refinancing costs. You could also ask another lender to waive some of their fees, as the lending market is competitive.

You could consider a redraw facility that enables you to make additional payments, which you can withdraw if you need the money. But you could be charged per withdrawal, there may be a minimum withdrawal amount, and a limit may be set on how many redraws can be done annually.

Another possibility is a mortgage offset, which may reduce your loan interest by allowing you to link your mortgage to a savings account. This account can be used for all your everyday banking needs, including withdrawing money and paying bills. While the money is in your account, it is ‘offset’ against your loan, reducing your interest. However mortgage offset loans often charge a higher interest rate, and fees may be charged for the offset facility. To find out more go to http://www.creditworld.com.au/home-loans.html.

Summary

How much you can reduce the life of your loan depends on a number of factors:

• The amount of the loan.
• The interest and whether it is fixed or variable.
• Your ability to make extra payments
• Interest rate rises or falls.

Some options include

• Paying fortnightly instead of monthly.
• Increasing the amount of each payment.
• Using a redraw facility.
• Using a mortgage offset.

Article correct at its author date: Dec 2006. Copyright Virtual Office Space, Any unauthorised reproduction of this article will be prosecuted to the full extent of the law. Credit Cards Australia.

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