Paying Off Our Mortgage Faster: Our Strategy as New Immigrants
When we bought our first home in Australia, the excitement was tempered by a daunting reality: a significant mortgage. The sense of owning a home was exhilarating, but the weight of a mortgage made it clear that we were embarking on a long financial journey. Determined to pay off our home loan early, we set out to paying off our mortgage with a strategic approach. In this post, we share our top 7 strategies for paying off your mortgage in Australia—based on real experience.
Understanding the Mortgage Challenge
Our initial feeling of excitement about home ownership was quickly accompanied by the weight of a hefty mortgage. The magnitude of the debt was daunting, and the thought of years of payments was overwhelming. Having never managed such a large debt before, we were determined to avoid future stress and pay off our mortgage as quickly as possible. The key to our success lay in strategic planning and disciplined execution.
Our 7 Proven Ways to Pay Off a Mortgage Fast
1. Opt for a Variable Interest Rate Home Loan
Choosing the right mortgage type was our first step. We decided on a variable interest rate home loan for its flexibility. Unlike fixed-rate loans, a variable rate loan allows for refinancing without penalty and offers features like a redraw facility and an offset account. These features enable us to make extra repayments and reduce the interest charged.
While variable loans come with the risk of rate increases, we prepared for this by planning how to handle potential hikes. Our goal was to take advantage of lower rates when possible while staying financially prepared for fluctuations.
2. Fix Your Repayment Amount
Despite opting for a variable interest rate, we chose to fix our repayment amount. This meant we committed to paying more than the minimum repayment specified by the bank. For instance, if the minimum was $400 per week, we set our repayment at $600 per week, including an extra $200 as additional repayment.
This strategy was a safeguard against potential interest rate increases and ensured that we were always contributing more towards the principal, accelerating our mortgage payoff. We budgeted carefully to ensure this higher repayment amount fit comfortably within our finances, factoring in future rate hikes.
3. Make Weekly Repayments
We chose to make repayments on a weekly basis rather than the standard fortnightly or monthly options. Weekly payments might seem like a small adjustment, but they significantly impact the mortgage term. For example, paying $600 weekly instead of $400 results in an additional $10,400 in repayments annually. Here’s a breakdown:
- Minimum Weekly Repayments: $400
- Annual Total: $20,800
- Increased Weekly Repayments: $600
- Annual Total: $31,200
- Additional Annual Repayments: $10,400
The increased frequency of payments helps reduce the principal balance faster and saves on interest over the life of the loan.
4. Utilize an Offset Account
An offset account can be a powerful tool in reducing mortgage interest. The offset account balance is deducted from the mortgage balance before calculating interest. For example, if we have a loan balance of $500,000 and an offset account with $50,000, interest is calculated on $450,000. This simple adjustment can lead to significant interest savings.
Our loan contract already included an offset account, which was a critical feature in our strategy to reduce interest costs.
5. Make Additional Repayments
Beyond our fixed weekly repayments, we also made additional payments whenever possible. Since we were living on a single income, we allocated my salary for investments, emergency fund top-ups, and extra mortgage payments. We decided on a percentage of my salary to be dedicated to mortgage repayments each fortnight.
We also directed any extra funds, such as tax refunds or unexpected windfalls, towards our mortgage. These additional contributions further accelerated our repayment progress.
6. Refinance Strategically
Refinancing can be a game-changer in reducing the mortgage term and interest payments. We originally secured a 30-year variable loan at a low rate of 2.73% in August 2020. Realizing that better rates were available, we initially waited a year to refinance, but a friend’s advice led us to explore refinancing sooner.
When refinancing, we focused on finding a lender that met our criteria:
- Online Lender: For convenience and competitive rates.
- Low-Interest Rate: To reduce overall costs.
- Low Fees: To avoid excessive costs.
- Offset Account: To continue benefiting from interest reduction.
We refinanced to a lower interest rate and shortened our loan term from 30 to 25 years. Although our monthly payments decreased due to the lower rate, we maintained our previous payment level, using the surplus for additional repayments. Additionally, we received a partial refund of Lender Mortgage Insurance (LMI), which we reinvested into our mortgage.
7. Consider Internal Refinancing
Several months after refinancing, we faced interest rate hikes due to economic conditions. We were unhappy with the increased costs and explored internal refinancing with our lender. This involved negotiating a lower interest rate and a reduced loan term from 24 to 18 years.
Our lender initially suggested making extra repayments, but we opted for internal refinancing to reduce the loan term and interest charges. This resulted in a reduced interest rate from 4.28% to 3.84% and saved us a decade’s worth of interest.
The Importance of Planning and Commitment
Paying off our mortgage faster required meticulous planning and unwavering commitment. We educated ourselves about mortgage mechanics, set realistic goals, and implemented strategies that fit our financial situation. The combination of regular additional payments, strategic refinancing, and leveraging features like offset accounts made a significant difference in our mortgage journey.
Our experience highlights that with careful planning and disciplined execution, it’s possible to pay off a mortgage faster and reduce overall interest costs. We’re proud of the progress we’ve made and are optimistic about continuing to make additional strides in our financial journey.
Looking Ahead
As we continue our mortgage repayment journey, we remain open to sharing further insights and updates. Our next focus is on giving back to the community and pursuing new goals as part of our Australian life. Stay tuned for more updates on our journey and the steps we’re taking to enrich our lives and contribute to our community.
Want to save more on your home loan? Explore our emergency fund strategy and budgeting guide for more practical tips.