Most home loans in Australia are structured over 25 or 30 years, but very few people actually take that long to pay them off. With a few consistent habits and the right loan features, you can reduce your loan term by years and save a significant amount in interest. Here are the strategies that work.
Switch to Fortnightly Repayments
This is the simplest change you can make with a meaningful effect. Instead of making monthly repayments, switch to fortnightly. Because there are 26 fortnights in a year (not 24), you end up making the equivalent of 13 monthly payments instead of 12. That extra payment goes directly toward reducing your principal.
Over a 30-year loan, this single change can reduce your loan term by several years, without you noticing any significant change to your budget. Check with your lender that this option is available on your loan, as some fixed rate loans have restrictions on repayment frequency.
Make Extra Repayments Whenever You Can
Any additional repayment above your minimum goes directly to reducing your loan balance. Because interest is calculated on your outstanding balance, a lower balance means less interest accruing every day. That compounds over time.
You don't need a large lump sum to make a difference. Even an extra $100 to $200 per month, maintained consistently, can shave years off a 30-year loan and save tens of thousands in interest.
Note: fixed rate loans often cap how much you can repay in extra payments each year without incurring fees. If you want the flexibility to overpay, this is a reason to favour a variable rate loan or a split loan structure.
Use an Offset Account as Your Transaction Account
If your loan includes an offset account, use it as your primary transaction account. Have your salary deposited directly into it, and pay all bills and expenses from it. The balance in your offset account reduces the interest charged on your loan daily, even while you still have full access to the funds.
The effect is similar to making extra repayments, but with more flexibility. You can draw on the funds if needed without having to apply to redraw from your loan. The more money you keep in the offset, and the longer it stays there, the more interest you save.
Apply Lump Sums When You Have Them
Tax returns, bonuses, inheritances, and other one-off windfalls can make a disproportionate difference when applied directly to your loan. A $20,000 lump sum paid in the early years of a loan, when the outstanding balance and interest charges are at their highest, has a greater long-term impact than the same payment made ten years from now.
If your loan is variable, applying lump sums is usually straightforward. If you're on a fixed rate, check whether extra repayments above a certain amount attract break costs or annual caps before you proceed.
Refinance to a Lower Rate
If your current interest rate is higher than what the market offers, refinancing could reduce your repayments immediately. If you maintain your current repayment level after switching to the lower rate, the difference goes to the principal rather than interest. This effectively accelerates your payoff without increasing what you pay each month.
The key is not to use a refinance as an opportunity to extend the loan term or extract equity for other purposes, if your goal is to pay the loan off faster. Reset the term and the financial benefit of the lower rate is significantly diluted.
Check Your Loan Is Working for You
At Swish, we regularly review home loans for clients who want to get ahead on their mortgage. If you're not sure whether your current loan has the features you need, or whether you're on a rate that's holding you back, it's worth taking a look.
Book a free call with Swish and we'll assess your loan and give you practical advice on paying it off faster.