How to pay off your loan faster to free up some spare cash

It’s funny, we spend so much time figuring out how to make ourselves attractive to lenders to get a home loan, but once we’re weighed down with the debt we just want to get rid of it.

And it’s no wonder, with a very significant chunk of our salaries going towards mortgage repayments.

If you have a 30-year home loan at the average amount of about $350,000 with an interest rate of 5 per cent, you’re paying $1879 to the bank every month. And only a very small amount is actually reducing your loan balance at least in the first five years, with most of the money going to the bank’s coffers in interest.

With that loan you’ll pay nearly $326,400 in interest alone over 30 years. But if you could pay it off in 10 years you’ll only pay about $95,500. That’s a massive saving of more than $230,000!

Stop and think about what you could do with that money in your pocket. You could spend it on holidays or other luxuries, your children’s education, put it into your retirement fund or invest it to grow your wealth.

When you get a loan it might seem like you’re going to be a slave to the bank for the next two or three decades, but that doesn’t have to be the case. At least not for that long, because there are ways to pay down your loan faster and make thousands of dollars in savings in the process. Just imagine being free of that proverbial noose around your neck!

Unfortunately, being a scrooge with money doesn’t end once you’ve bought your home. Image: Supplied

Now, don’t be under any illusions that it’s going to be easy to get rid of a mortgage. Unless you’re doing something extraordinary you won’t pay it off in just a few years, but you can shave many years off the normal term.

So, how to pay it down faster? Put simply, you need to pay as much as you can off your loan as quickly as you can. You should be putting every spare dollar towards your mortgage.

We all know you need to be a good saver to buy a home, but being a scrooge doesn’t end there. You need to continue saving to make your regular loan repayments, contribute more to pay your mortgage off faster (if you choose to) and have cash reserves in the bank.

If you are a good saver, with surplus funds, a good option is having an offset account linked to your home loan.

You can still transact from this account, but the amount in it is offset daily against your loan balance, which essentially reduces the interest component of your repayment.

For example, if you have a $350,000 home loan and you have $20,000 in a 100 per cent offset account, you are only paying interest on $330,000. If you maintain this amount in your account over the life of the loan you’ll save more than $60,000 in interest and reduce your loan by nearly three years.

The interest you pay each month will fluctuate in line with the balance of your offset account, but the bottom line is that you’re paying less interest and more principal off your loan, which is the key to paying it off faster and saving thousands of dollars.

Even if you don’t have lots of savings you can have your wages paid into your offset account, and you can put most of your expenses on your credit card to be paid at the end of the month, keeping the balance of your offset account higher for longer.

If your saving skills are a little lack-lustre, having an offset account may not be for you.

If you’re not a disciplined saver, it might be better to make bigger repayments instead and consider using a redraw facility, if your income allows for it.

If you contribute just an extra $100 a month it would save you about $40,000 in interest and reduce your loan by around three years.

You can also opt to make more frequent repayments – pay your mortgage off fortnightly rather than monthly. Since there are 26 fortnights a year you’ll end up making 13 monthly repayments rather than 12, which can save you about $60,000 in interest and shave four years off the loan.

You should also put any lump sum payments straight into your mortgage.

Shopping around for a cheaper interest rate is another option, but if you switch to a lower rate you must continue to make the same repayments.

Look at online calculators to see the difference extra payments or offset accounts can make to the life of your loan to give you motivation, but seek personalised advice from a mortgage professional for more accurate information.

* Figures provided are from online calculators from various banks.