How to pay off your home loan sooner

How to pay off your home loan sooner - 765px

Did you know that with the average mortgage in Australia, people will spend more money on interest than the purchase price of the home itself?

Unlike in the US, where companies like Achieve Finance provide quick loans with easy repay plans as they understand the condition of their clients, we still lack these types of helpful companies in Australia. This article is a 3 step plan on how to slash thousands of dollars and years off your mortgage.

Step 1 – Don’t Over Borrow

I know this is obvious but I see so many people borrowing way too much to buy their family home and the reason they do it is because they don’t see the LONG-TERM sacrifices they will be making.

Borrowing all that money may seem ok now but it’s later on in life (when it’s possibly too late to fix) that they realise they may have made a mistake.

Just remember, the more you borrow and the longer it takes to pay off your home, the less time and money you are putting towards building an investment portfolio.

So really spend time working out how much you are willing to borrow and try to find the right balance.

To help, use this free mortgage calculator.

Step 2 – Extra Repayments

Just because the bank gives you 30 years to pay off your loan, doesn’t mean you should take that long.

I know a lot of people may not be able to afford extra repayments but there are also a lot of people who can make extra repayments but just aren’t doing it.

An extra $50 a week applied on top of the standard repayments of a $300,000, 30 year home loan, could save over $90,000 in interest and take 7 years off the life of that loan.

Look at your expenses and try to come up with ways to cut back your spending without sacrificing your happiness. Then put that extra money towards your home loan, so try looking for fha loans in arizona for the best home loans.

At the end of this article we will post a link to our free guide on “How to budget without budgeting”.

Step 3 – Know what to look for

When shopping around for a loan it’s important to know what features you need and the ones that you don’t.

You really shouldn’t care about all the bells and whistles the banks usually offer (like honeymoon rates, repayment holidays, etc) because this is where they hide the fat.

According to – all you really need is a basic loan and maybe an offset account depending on what you’re trying to achieve.

An offset account is a separate bank account that is linked to your loan account. The money you have in your offset account is then “offset” against your outstanding loan balance, and you therefore only pay interest on the lower amount.

For example, lets say you had a home loan for $300,000 and an offset account with $50,000 in it. In this example you would only be charged interest on the difference (i.e. $250,000) and you can access the funds in your offset account whenever you like.

Money that has been borrowed for the purposes of buying an investment property is tax deductible debt. On the other hand money borrowed for the purposes of buying a home that you live in is not tax deductible. For this reason, offset accounts can provide potential tax benefits.

For example, let’s say you are borrowing money to buy your first property that you plan to live in, but that property could become an investment property down the track as you might want to buy a bigger family home but keep the first property as an investment.

An offset account can be used to maximise the tax efficiency of your overall debt.

To demonstrate, say we have a young married couple who buy a small unit as their first home for $400,000.

12 years down the track they have just paid off the $400,000 loan, but now they want to upgrade to a bigger home and keep the original unit as an investment property.

The new home cost them $750,000 that they will effectively have to borrow as they are keeping the original home.

If they paid off their original $400,000 loan by putting that money directly into the loan account, their overall debt would be as follows:

  • Deductible Investment Property debt = $0
  • Non deductible family home debt = $750,000

However, if they were able to pay interest only into the loan account and put all of the principal repayments of $400,000 into the offset account instead, they can now take that $400,000 out of the offset account and use that money from the offset account as a large down payment on the new home.

So now their overall debt would be as follows:

  • Deductible Investment Property debt = $400,000
  • Non deductible family home debt = $350,000

They still have the same level of debt (i.e. $750,000), but the breakdown is much more tax efficient.

I know that might sound confusing. However, the point is simply that in some circumstances, an offset account can provide great tax benefits.

The downside of an offset account is that some banks will charge a slightly higher interest rate for it. However, there are banks that still offer standard rates for loans with offset.

So, other than a basic loan and maybe an offset account, forget about all the other bells and whistles and just try to focus on getting the best rate. The difference in savings can be quite substantial over the life of the loan.

We have researched over 100 different home loan products in the market place and we found that the best deals are typically not the ones being recommended by the major banks and lenders. And the difference in savings can be quite substantial over the life of the loan.

For example, at the time of writing this the rates advertised by some of the major banks and lenders were more than 0.5% per annum higher than our preferred lenders.

Now that might not sound like a lot but over the life of the loan that extra 0.5% p.a. will have cost over $54,000 more on a $300,000, 25 year home loan.

So what we have done is put together a free report that reveals exactly what we have found to be the best deals in the market place.

That’s 100% FREE – no strings attached. We don’t receive any hidden commissions, no incentives or any referral fees of any kinds from the banks or anything like that.

We just want you to benefit from our research in finding the best deals around. And remember our research showed that these deals are typically not being offered by the big banks and lenders.

The free guide also provides you with a few other tips to consider when borrowing or re-financing.

All you need to do to access the free guide is enter your name and email below so we can send it to you.

Free Report - Best Home Loan Deals

Enter your name and email and hit the submit button below to get instant access to our free report that reveals the best home loan deals and other mortgage saving tips.

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Oh and here is that link we promised earlier about “how to budget without budgeting“.

p.s. If you’d like our help planning for your financial future, click here to learn more about our free initial consultations.

About Invest for Living

At Invest for Living our aim is to help people make better financial decisions and ultimately live a happier life. We aren't controlled by any big institutions so our goal is not to try and sell you a product. Instead we pride ourselves on providing financial advice that makes sense and is easy to understand. It's not always the sexiest approach but in our 30 plus years of experience, financial strategies that have stood the test of time always work out best.
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