6 steps to pay off your first home in half the time - and save thousands

1. Skip the bells and whistles

Offset home loans can be a great way to put spare cash to work helping to pay down your home loan. The catch is that you need a decent sum of money parked in the linked offset account to really make headway with your mortgage.

As a first home owner, it’s a fair bet you don’t have tens of thousands of dollars left over after buying a place of your own. That being the case, it’s worth sticking to a low rate basic home loan that offers fee-free extra payments. You won’t get all the bells and whistles, but you are likely to get a lower rate.

2. Shop around for a great rate

Maybe you’ve banked with the same financial institution for years. Don’t let that stop you shopping around for a great deal. The average rate on new loans is 2.77%, but who wants to be average? You can do better. One of the lowest rates on the Canstar database is 2.04%. It’s just a 0.73% difference, but on the average $446,000 loan repayable over 30 years, it can cut your total interest bill from $211,000 to $150,000. Saving: $61,000.

3. Make repayments as if you have a shorter term

The beauty of variable rate home loans is that you have the flexibility to pay more than the minimum monthly repayment. So, if you take out a 30-year loan, you’re free to make repayments as if you had a 25-year loan term.  This lets you get ahead with the loan with the benefit of some wiggle room if something happens and you need to trim back repayments. 

To see how this can work in your favour, let’s use a hypothetical couple Chris and Anna, who borrow $446,000 at 2.04% over 30 years. The minimum repayment is $1,657. But they pay $1,899 each month – the payment that would apply if they had opted for a 25-year term. This way, they’re mortgage-free five years sooner, and the long term interest cost is whittled down from $150,000 (see Step 2) to $124,000. Saving: $26,000.

4. Pay a bit more each month

Additional payments are one of the most effective ways to save on your home loan. Looking again at Chris and Anna, we’ll say they commit to adding $200 extra to their monthly payments. That’s just fifty bucks a week – about the price of a Friday night takeout. By sticking to this strategy, they can slash the total interest they pay from $124,000 to $108,000. Saving: $16,000.

5. Ramp up extra payments over time

During the course of the loan term, your income is likely to rise. That puts you in a position to dial up those extra payments over time. 

Sticking with Chris and Anna, we’ll assume they make a habit of adding $50 to their additional repayments with each flip of the calendar. So in Year 2 they pay $250 a month extra; in Year 3, $300 a month extra, and so on.

By following this pattern, the couple will have paid off their mortgage in 18 years, cutting their total interest bill from $108,000 to $92,000. Saving: $16,000.

6. Add in windfall gains

Okay, not many of us will inherit a fortune or become Lotto millionaires. But plenty of people pocket cash they didn’t budget for. In particular, I’m thinking of an annual tax refund. It’s money you’ve never had, so why not put it towards paying down your mortgage? 

We’ll say our hypothetical couple Chris and Anna use their combined tax refunds to make a lump sum payment on their loan of $2,000 annually. Lots of PAYG workers receive far more back on tax, so there’ll likely be money left over for fun spending.

Knocking $2,000 off their loan each year can cut Chris and Anna’s interest bill down from $92,000 to $85,500. Saving: $6,500.

Here’s a quick recap of what our couple saved with smart – but simple – strategies: 

• Competitive rate: $61,000
• Make repayments as if the term was 25 years, not 30: $26,000
• Extra repayments: $16,000
• Growing extra repayments annually: $16,000
• Lump sum payments each year: $6,500

All up, our couple can score interest savings totaling $125,500. Better still, they will have paid off their home in just over 16 years – close to half the original loan term of 30 years.

Of course, interest rates won’t stay at their current rock bottom levels for the next 25 years. That’s a good incentive to start getting ahead with your loan now, before rates rise in the future.

Effie Zahos is an independent Director of InvestSMART, money commentator at Canstar.com.au and Channel 9 Today Show.  

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