How To Pay Off a Mortgage Early and Save Hundreds of Thousands

How To Pay Off a Mortgage Early and Save Hundreds of Thousands

Back in my early 20’s, faced with a ‘giant’ mortgage and a job that left me feeling trapped, 30 years seemed like an eternity. Faced with spending my whole adult life (and more than I’d spent on this earth up until that point) paying it off, I devoured my step father’s investing library looking for how to pay off a mortgage early.

Up to then, I believed that everyone takes 30 years to pay off a mortgage. I was wrong. Thirty years may be the loan term, but it doesn’t have to take that long. It doesn’t even have to take 25 or 20. Here’s how to pay off a mortgage faster.

I learnt that Italian families paid off their loans much faster than other households in Australia. They grew their own vegetables, saving around $20 a week. This money was tucked into their home loan accounts and that’s how they slashed the time it took to repay their mortgages.

The best time to pay down your mortgage

I became obsessed with figuring out how we could do the same and spent hours looking at the variables on a mortgage calculator. I knew that a $300,000 loan meant $600,000 in total repayments over 30 years.

Looking at the calculator it was clear that initially very little of our repayments would be paying off the principal. Most of our money was going against the $300,000 in interest the bank was going to get. Meaning that despite paying $23,000 a year or so in repayments the principal on the loan was reduced by a measly $3,000. Very little equity was being built in the first few years of the loan.

Loan amortization graph (Source: Credit Karma)

It turns out the best time to pay extra off a home loan is at the beginning. By reducing the principal as quickly as possible, more of the annual repayments contribute to paying off the loan, meaning less of it is lost to interest.

From that moment, our major priority became paying off the house. Well, that and renovating the house top to toe, getting married, going on a few overseas trips, buying a new car when the electrics in our old one started failing and deciding to freelance for a few years. Clearly it worked, because we paid our house off in 9 years.

How to Pay Off Your Mortgage Faster

1. Increase the Frequency of Repayments

The first step was straight from the Early Mortgage Repayment 101 and it didn’t hurt at all. Most loans are set up on the basis of monthly repayments. We increased the frequency of our repayments from monthly to weekly.

This meant that instead of paying 12 yearly payments we paid the same amount spread over 52 payments. Since interest is calculated daily, the more repayments you make the less you pay in interest.

Also making fortnightly repayments instead of monthly ones means you make the equivalent of an additional months’ payment although check this with your bank before making the switch.

On a $400,000 loan at 4.9% interest with a 25 year loan term, making fortnightly instead of monthly payments can reduce the length of the mortgage by 4 years and saves more than $60,000 in interest.

2. Increase the Repayments

Our next step was to do as the Italians did and put a little extra into our mortgage each week. Twenty dollars seemed like a relatively painless amount at the time so that’s where we started.

That small increase alone would have saved around 4 years and $60,000 in interest.

While my aim is to show you how to align your spending with your priorities, I’m also a big believer in automation. Much like the ‘pay yourself first’ principle; I’m a big fan of pay your loan first.

It’s easy to believe that you’ll regularly make extra payments to your loan as you save more money. Realistically, this relies on discipline and memory. If you want to get ahead, increase your weekly repayments by a reasonable amount. That way, no matter what life throws at you, you will be getting ahead.

3. When Interest Rates Go Down

Once upon a time interest rates were going up and everyone was talking about whether or not to fix the mortgage. Hard to believe hey? We didn’t do anything even as they reached their peak of 9.5%. Just in case I did panic a little because it seemed like a needed to make a grown up decision and I wasn’t sure how. Even now, grown up decisions scare me.

Then the crash happened and interest rates started going down…pretty quickly to a low of 5.5%. We left our mortgage repayments where they were and soon instead of making $20 a week extra, we were making $40 and eventually $50 extra payments per week.

Granted, interest rates are more likely to be going in the opposite direction in the coming years, but hopefully your situation will be improving.

The sentiment is, that each time you get a bit more money, whether through a pay rise or a second income, bump up those repayments. It will make years worth of difference and save thousands in interest.

4. Talk to Your Bank Manager

I’m convinced that local bank managers are very friendly people and love talking about money with their customers as much as I do.

A simple appointment to discuss your banking situation can yield thousands in savings. When we visited our branch, not only were our bank fees waived saving $180 a year, our home loan interest rate was reduced by 0.5% saving us around $1,000 per year.

5. Set Up a Mortgage Offset Account

At the time of our loan setup, a mortgage offset account was not our best option. I have no idea why, but our loan wasn’t structured that way.

That said, I know friends and family who have used these types of accounts with great success. Basically all your savings are counted as principle paid in advance meaning you pay less interest because you’ve effectively paid ahead on the loan. The advantage is that your savings are still accessible to you.

I know you can try to beat the system with an offset account by paying for everything during the month on credit card to keep the maximum amount of money in your account and then paying the balance off in full. It’s a good strategy if you’re disciplined with credit card use and if you’re not tempted to dip into your savings.

6. Paying Off Lump Sums

A bonus here, an extra $1000 there and you’d be surprised how quickly the principle of your loan can be paid down, especially in the early years of the loan term. Making extra payments in the form of lump sums is arguably the more painful way to get your mortgage paid off, but the results can be exceptional.

Essentially, paying off lump sums is the this is the ‘smash your mortgage’ approach. And it can be totally addictive.

Our early lump sum repayments weren’t big and we did redraw a few times to pay for our renovation. We were also getting ahead through the other strategies so making additional payments wasn’t as critical. The main driver was when we saw what an impact these little extras made on our mortgage.

Four years into the mortgage we were the equivalent of being 15 years through it according to the amortization schedules.

Paying it off early became our financial goal. We knew we could do it so we evaluated each spending decision so as to be able to pour every spare cent into the mortgage.

Nine years and 3 months into the loan term, we were done, the house was ours. It would be another 6 months before we found out we needed to ‘register a release of mortgage’ but that’s a story for a different post.

The ‘Debt is Normal’ Mindset

Despite knowing we’re living mortgage free, a close friend recently justified a huge expenditure by telling me that they would be paying off their mortgage for the next 30 years anyway so it didn’t matter. I was aghast. Knowing the couple’s financial situation, I was certain that if they wanted to they could demolish their home loan. Instead they seemed resigned to the 30 year time frame because that’s what everyone else does.

I want to tell you, it is just a mindset. You can pay off your mortgage as fast as you want. This is great news if you’re considering buying a property, but are worried about being tied to a 30 year loan. It doesn’t have to be that way.

Australians are actually pretty good at paying off their mortgages faster. Around half of all borrowers are ahead. The average household is paid up 1.5 years in advance, with around 15% of mortgagees having a buffer of more than 2 years.

One and a half years is a great buffer against the unexpected, but it’s not cutting much off a 30 year loan term which is the length of time most mortgages are repaid in

Liberate yourself from the idea that everyone has debt, so you don’t need to do anything about yours. Focus on making good decisions, not normal ones.

The New Australian Dream

Paying off the mortgage is the new Australian Dream which is not surprising given our insane mortgages. Yet tellingly, in the same survey that revealed this, participants said that if they were gifted with $50,000, most would put more than half of it against their mortgage.How we paid off a mortgage in 9 years

Half? If your dream is to pay off your mortgage, then why wouldn’t you put in the full amount? As the example above shows you would be almost doubling your money by reducing the interest payments.

So why half? Because most people believe it will be almost thirty years before they are mortgage free. Paying off a loan over your entire adult life is seen as a fact of life. This means most people don’t question this assumption and never really get ahead.

This is the ‘debt is normal’ mindset.

But is debt good? Do you want to have a mortgage your entire working life if there is an alternative?

There is an alternative and it starts with changing the assumption that a mortgage is for life.

Liberate yourself from the idea that everyone has debt, so you don’t need to do anything about yours. Focus on making good decisions, not normal ones.

Believing it can be done, there are lots of people who pay their mortgages off in 10 or 15 years or less. How soon could you have your loan paid off? Check out what you need to do by testing the variables on Amortization Schedule Calculator.

How soon would you like to have your loan paid off? What strategies are you using to paying off your mortgage quicker? Are you mortgage free? If you are, how does it feel?

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7 thoughts on “How To Pay Off a Mortgage Early and Save Hundreds of Thousands”

  • Very well written post! As my wife and I get closer and closer to buying a house, I find posts like these more interesting. That was really smart to increase the mortgage repayments from 12 a year to 52 – definitely something we’ll have to look into. I’ve actually been looking into an Adjusted Rate Mortgage to try and pay the loan off before 15 years (pay more of the principle up front with less interest), but I’ll have to look into exactly how feasible that would be.

    • Thanks Matt. It sounds like you’ve done a lot of research and you’re entering homeownership with a plan, which is great. I believe our home loan was an adjusted rate mortgage although in Australia they’re called variable rate loans. As far as I can tell, it’s the same thing just different terminology, so 15 years is totally doable. Best of luck with finding a place!

  • By far the best thing that I ever did was pay off my mortgage. I made extra payments whenever I got bonuses, promotions, gifts, etc. I was constantly throwing the money towards the mortgage in the hopes of paying it down. It took 7.5 years but it was well worth it in the end. 🙂

    • Well done Mustard Seed Money, it’s such a relief to watch that balance go down. Definitely a positive reinforcing loop which justifies throwing all your spare money at it.

  • Great post! I loved the section “THE ‘DEBT IS NORMAL’ MINDSET.” This is one of the greatest issues with American’s today. It certainly applies to people taking out HUGE mortgages, but also to the majority of larger purchases as a whole.

    “If I finance this {insert object} it’ll only cost me $50 per month!” Do you really need that? *ROLLS EYES*

    • Thanks Lance. Part of the trouble seems to be the attitude that “if the bank will lend it to me, I must be able to afford it”. It’s a really risky approach because change in life is inevitable and if you’re mortgaged to the hilt, you have less ability to make good choices for you in the future.

  • Everytime I received a raise or bonus I would apply it to my mortgage. I was able to pay off my mortgage in 7.5 years this way and definitely is/was the best thing that I’ve done financially. It’s opened up financial opportunities that I never would have imagined. Not having the weight of a mortgage is definitely a great feeling 🙂

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