How to pay off your mortgage faster

Your mortgage is likely the biggest financial commitment you'll make in your life. This is why it's important to have an effective strategy in place when it comes to paying off your mortgage faster. 

What makes up a home loan?

Before we discuss our tips to pay off your home loan faster, it's important to at least have a basic understanding of what makes up a home loan.

Home loans consist of two parts: the principal (the loan amount you borrow from the bank) and the interest (the cost of borrowing that money). In general, the interest for your home loan is calculated based on the amount of principal owed each day. This is why home loans are generally harder to pay off at the start of their term. That's because generally the beginning is when we owe the most amount of money. This is also the main reason why paying off a mortgage completely can seem impossible at first, especially for new homeowners.

With this in mind, let's get started with our home loan repayment tips!

Tip #1: Increase your repayments

A typical home loan can have a term of up to 30 years - which is quite a long time. However, small increases in your repayments can quickly add up and shave heaps off your mortgage term and interest payments if done consistently.

Consider the following home loan example:

Home Loan: $700,000

Deposit (20%): $140,000

Interest Rate (2 years): 5.79%

Repayment (fortnightly): $1,510

Home Loan Term: 30 years

Amount Owed: $560,000

Total Interest Paid: $621,040

This basic example illustrates how the interest portion of a home loan ($621,040) can actually exceed the remaining amount owed ($560,000) for the same loan. This is why it's important to start strong and squeeze out as much extra money as possible to increase your repayments.

With the same example in mind, consider what would happen if you were to increase your mortgage payments from $1,510 to $1,600:

New Repayment (fortnightly): $1,600

New Home Loan Term: 26 years

New Total Interest Paid: $523,232

A 90$ increase in repayments resulted in four years being taken off the overall term of the loan, as well as a potential $90K + reduction in total interest being paid. Now, imagine how much more you could save in terms of time and interest payments with an even bigger repayment amount?

Setting up a mortgage structure that maximises the size of the repayments you could make while still allowing you to have a comfortable lifestyle is very important. This is why getting independent financial advice beforehand is key.

Tip #2: Have a flexible mortgage structure

In our previous blog, we discussed how a split home loan can give you both the flexibility of making lump sum repayments to pay off chunks of your mortgage, as well as the security of having consistent monthly repayments. Through the help of an independent financial adviser, you can create a split home loan structure that is specifically designed to pay off your mortgage faster without straining your finances.

Tip #3: Switch from monthly payments to fortnightly payments

This might seem like a strange tip, especially if you assume that you'll simply end up paying the same overall amount, just in more frequent intervals. However, what's less obvious is the fact that you will be able to make two additional payments per year through this simple change if you simply halve the monthly payments and pay it fortnightly.

As mentioned in our first tip, small changes that are consistently done throughout the term of your loan can result in significant changes. This simple change, coupled with increasing your repayment amount, can shave even more years and thousands in interest payments off your mortgage.

Tip #4: Put your money to work

Throughout the year, we often end up accumulating extra money without noticing. This could come from several sources, from tax refunds to the odd piece of furniture being sold on TradeMe. When it comes to paying off your mortgage faster, it pays to be diligent especially when it comes to spare money that we would otherwise neglect. Make it a habit to review your finances and consistently set aside what you can to accumulate more extra payments for your mortgage.

Tip #5: Get creative with mortgage calculators

All major banks feature online repayment calculators that you can use to visualise how you can pay off your mortgage even faster. Have a play and see how far you can take your finances in terms of maximising your mortgage repayments. Seeing the number of years and interest payments you can shave off with a click of a button could be the inspiration you need to take your financial planning into overdrive!

Tip #6: Talk to an independent financial adviser

Like going for a regular check-up with your doctor, talking to an independent financial adviser can help ensure you are repaying your mortgage as fast as you can. Not only that, getting independent advice can also help you plan ahead in case something unexpected happens. From an unexpected promotion at work to welcoming a new baby into your family, life's many ups and downs can easily derail your mortgage repayments without a proper plan.

Talk to our team

There are plenty of ways to pay off your mortgage faster, from increasing your monthly payments, to streamlining your finances to making more extra payments, and updating your financial goals for the year. Sue and her team have decades of experience in helping Kiwis prosper in the New Zealand property market. We would love to have a chat with you!