finance

The tricks savvy home-owners are using to get out of mortgage debt sooner.

With property prices going up, purchasing real estate in Australia and taking out a mortgage is costly, and as a result, many Australians are taking charge and freeing themselves of mortgage debt sooner.

Depending on how home loan savvy you are (let’s face it, many of us don’t want to think about it), you’re probably aware of some strategies you can use to both save interest and reduce your loan term.

It’s promising that Australians are being proactive about repaying their mortgage and opting to pay down their debt faster, but how are they actually doing it?

A new finder.com.au survey of 2005 Australians revealed 89 per cent of borrowers have tried to repay their home loan faster, with the majority (60 per cent) opting to make additional repayments.

Around 40 per cent of borrowers make more frequent repayments either on a fortnightly or weekly schedule, while 34 per cent of borrowers use an offset account to lower their interest charges. Negotiating for a better interest rate with an existing lender (18 per cent) and refinancing to a new lender that offers a lower rate or other money-saving features (12 per cent) were also identified as ways of fast-tracking mortgage debt.

Women are marginally more likely (90 per cent) to repay their mortgage sooner, compared to their male counterparts (88 per cent).

Women were slightly more likely to repay their mortgage sooner. (Image via iStock.)

Is it worth the hassle? How much can I actually save?

Your home loan is the largest financial commitment you’ll have during your lifetime, and one you’ll be chipping away at for 25 - 30 years, but are the savings worth the effort?

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You may have heard it all before; “being smart with your home loan could save you thousands”, but you probably put it straight in the ‘too hard’ basket. However, you may be more motivated (and excited) to pay off your mortgage faster once you see an actual figure you could save. So what does “being smart with your home loan” actually look like? Let’s look at three avenues you can take.

Making extra repayments (above the minimum).

On a $365,000 home loan with 5.5 per cent interest, if you made extra monthly repayments of $200, you’d save $83,911 in total and you’d lower your loan term by five years and nine months. The home loan would be paid back faster, and the additional monthly $200 will cost $58,200 in total. Think of how you could use that extra $25,711 - your child’s tuition fees, an overseas holiday, or a property or other financial investment.

Of course, making additional repayments is just one method you can use to speed up your mortgage repayments, and this approach demands financial discipline and planning, but the reward is absolutely worth it.

Spend that extra money on a holiday. (Image via iStock.)

Using an offset account.

An offset account works in a similar way to a transaction account, and the benefit is that it allows you to reduce your interest charged on part of your mortgage where there are funds in the offset account.

Using the above loan details, if you had $5000 in the linked offset account (and you began the offset at year five), you’d save $14,338 and you’d reduce your term by seven months. Whether it’s a work bonus, money you have sitting in a high-interest savings account, or any other extra income you’ve run into, having $5000 in an offset account is a realistic strategy for many homeowners.

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Refinancing with a new provider.

You can save big by switching to a new lender that offers a better mortgage interest rate. Jump online and compare rates offered by banks (including smaller fringe lenders and online providers) and see if you could save by switching. Even a rate discount of just 0.2 per cent could enable you to save thousands over the life of your loan.

Small changes can equal big savings. (Image via iStock.)

If you are refinancing with a new provider, just make sure the switching costs don’t outweigh the savings. For example, make sure that any costs you encounter such as discharge fees and establishment fees for the new loan don’t outweigh the savings you’ll earn from the more competitive interest rate. Use an online calculator to help you decide if refinancing is the right option for you.

It takes determination and patience to get ahead on your mortgage repayments, but being smart with your loan and knowing which strategies you can use to get ahead will help you save thousands, and ultimately improve your quality of life.

Bessie Hassan is a money expert at finder.com.au.

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