You are on a 30-year home loan. The initial couple of years of excitement after getting a new home has worn off. Now you are not looking forward to paying off the loan for the rest of your working life and want to learn how to pay off your mortgage faster.
Paying down a mortgage can be a struggle. A large mortgage is overwhelming and limits the ability to make financial choices. Especially if the home is the largest investment you have made.
Living mortgage free, on the other hand, opens up a whole world of financial possibilities.
Imagine living a lifestyle where you can take regular holidays, work part-time, vacation overseas or send your children to the school of your choice.
When the mortgage disappears, your extra disposable income can then be put towards investments, savings plans and retirement funds that will provide both financial security and the freedom to make better lifestyle choices in the long run.
Establishing some simple behaviours and creating new habits can easily lead to learning to control your finances and mastering your spending.
So how can you pay off your mortgage faster?
1. Plan a Realistic Budget
Learning to manage your money and establishing a positive relationship with your finances is an important life skill.
Stop launching into an unrealistic budget that doesn’t allow for the occasional take out or new shoes.
Start with one or two small changes at a time.
Keep your emotional spending in check.
Keep your long-term goals in mind.
2. Make Additional Repayments
When you establish your budget and the motivation behind paying down your debt, you will have a fair idea as to how much disposable income you’ll have at the end of the month.
Then set up an automated plan to move these funds straight onto the mortgage.
If it’s not in your spending account and is harder to access, you’ll be less likely to impulse spend those hard-earned excess dollars away.
Don’t be discouraged if you are left with an extra $50 or $100 dollars. Every extra dollar that you can pay onto your mortgage adds up. The amount of interest that you can avoid paying just by making small, regular overpayments will surprise you.
An average couple with a $500,000 home loan at 4 per cent interest will repay $359,348 in interest over a standard 30-year term.
You will save up to $55,915 and pay off your home four years sooner by making an additional $50 repayment per week.
If your lender doesn’t allow you to make additional repayments, it’s time to shop around for a better deal.
3. Learn to Negotiate
Negotiating a lower interest rate is not as daunting as it sounds. Your current home loan may have been competitive at the time you purchased. This may not necessarily be the case five years on.
Shop around and see if you can find a better deal. Even seemingly insignificant adjustments in the interest rate can save thousands of dollars across the life of your loan.
Do not stop there. Ask your bank to waive the account keeping fees or provide a better interest rate on your savings account.
Providers of utilities, mobile phone plans, and car loans are all competitive and willing to offer great deals to new customers. The banks are no different.
When you negotiate you should be aware of potential early exit fees on existing contracts, and wary of honeymoon periods offered to entice new customers.
The long-term interest rate is where you will potentially save the most money on ongoing bills.
4. Consolidate Debt
Most homeowners have multiple debts and since home loans typically have lower interest rates than other debt, consider consolidating for a lower rate overall and fewer fees.
Consolidating debt is a money-saving tactic that could significantly improve your financial situation, freeing up thousands of dollars of additional funds.
Consolidating a car or personal loan with a $250 weekly repayment would give you an additional $1000 to overpay on your mortgage.
This additional $1000, (using the example above of the $500,000 home loan at a 4 per cent interest rate over 30 years), would save you $169,873 in interest and clear your home loan 13 years sooner.
Use an online mortgage repayment calculator to plug in your numbers and see how much you can start saving.
5. Learn to Live on Less
What can you give up? The daily latte, Netflix and consistently driving in tolls are all easy ways to spend money that we could otherwise be using to secure our financial position and pay off our home loans sooner.
That seemingly insignificant $4.50 latte, when purchased 5 days a week, adds up to $90 per month that you could be using to pay down your mortgage, saving an additional $27,677 in interest and two years off your loan term.
If you apply this same thinking to all spending and can learn to live on less, you’ll soon find thousands of dollars in interest savings.
6. Leverage
Getting further into debt may seem counterintuitive, but many homeowners will leverage their money by using investments to create additional income streams and pay off their mortgage faster.
Positively geared property, renovating for a profit, investing in shares and using a high interest savings account to benefit from compound interest are all ways to increase your earning capacity.
If these ideas are a bit of a stretch for you right now, consider finding small, easy ways to make more money.
7. Create Additional Income Streams
There are a myriad of ways for the enterprising person to make money.
Uber driving, completing quick jobs for agencies such as We Go Look, renting out your home on Airbnb when vacationing, and renting a spare room are all ways to think outside the box and make money on the side.
If you live within close proximity to a city, consider renting out your driveway.
If you live on a larger block, perhaps a backyard shed could be rented out as storage space.
Flexible working arrangements may allow you to work from home, saving on petrol, tolls, clothing and car depreciation.
You can turn hobbies into a side business, selling at markets or on eBay. Selling unwanted items from the home is a great way of decluttering and making some spare cash on the side.
Become financially savvy through creating new habits that are both practical and easily reinforced.
Use the above steps to find new and interesting ways of saving money, making more money and paying off your debt faster.
Remember, you get a 30-year home loan based on your situation at the time of getting the loan.
Do not just stand and do nothing.
Get creative, take action and get that home loan paid off faster and on your own terms.