How long does it take to pay off a mortgage?

You can always aim to pay off your mortgage sooner. Don’t let the seemingly never-ending 30 year term of your loan discourage you. Find out how you can shave years and money off your home loan.

How long does it take to pay off a mortgage?

A home loan term in Australia typically ranges between 25 and 30 years. How quickly you can pay off your mortgage will often depend on how you decide to pay interest. While other factors, such as accessing equity, can increase the term of your loan.

Can you save with a lower interest rate?

Factors affecting how quickly you can pay off your mortgage

There are many variables that can affect how much you pay over the term of your loan.

Principal

The principal amount of your loan is how much you have borrowed from your lender. If you have a larger deposit, you will decrease the principal amount. Conversely, if you have a smaller deposit of less than 80% of the property’s lender-assessed value, you will have a larger principal amount and may be subject to paying Lenders' Mortgage Insurance (LMI).

This typically entails a higher interest rate charged due to your high-risk level as a borrower. Work out how much you could save with a larger deposit with Lendi’s LMI Calculator, or read their LMI guide.

A high interest rate

Interests rates rise and fall depending on the cash rate of the Reserve Bank of Australia. Interest rates can vary among lenders, and it is best to shop around for the lowest interest rate. If you have a principal amount of $400,000, charged at an interest rate of 5% over a 25 year loan term, your monthly repayments would be $2,338.

By shopping around for an interest rate only 0.5% lower, you could be paying $2,223 per month. On the surface this doesn’t seem too drastic, but over the term of the loan, this lower interest rate saves you $34,500! Use Lendi’s Home Loan Repayment Calculator to work out how much you could save with a lower interest rate.

Your repayment frequency

Depending on the terms of your contract, payments towards your home loan are usually made monthly. However, you may want to speak to your lender about making fortnightly (or weekly if your lender allows) repayments.

By splitting your monthly repayment into two fortnightly ones, you will be paying 26 fortnights a year, instead of 12 months. This means over the course of the year you’ve made an extra month’s worth of repayments.

The more repayments you make to pay off the principal amount of your loan, the better. Interest is calculated each day, whereby the principal amount on your home loan is multiplied by your current interest rate, then divided by how many days in the year. The daily interest calculated is cumulated over the month to give you your monthly interest repayment.

Type of loan chosen

The type of loan you choose can make a major impact on how early you can pay off your loan. When applying for a loan, you have the choice of a fixed, variable or split rate loan, all of which have their pros and cons.

Fixed rate loans lock you into a fixed period whereby the rate is set by your lender, and does not change over that term. Variable rate loans have interest rates that may fluctuate during the term of your loan depending on the Reserve Bank of Australia and your lender.

Variable rate loans often give you access to offset accounts, redraw facilities and the ability to make extra repayments, that a fixed rate loan may not offer. Fixed rate loans may allow to to make overpayments, but charge you a fee to do so.

If you’re unsure about which to choose, consider a split rate loan where you can take advantage of the benefits of each. Read more about fixed and variable rate loans here.

What is an interest only loan?

An interest only (IO) loan is when you only pay the charged interest on your principal amount and are not paying off any of the principal amount. IO loans generally have a 5 year limit, after which you will start paying back your principal amount.

Related: Are you ready to pay more when your IO period ends?

Advantages

• Because you are paying only the interest on your home loan, you will have lower monthly repayments.
• They are useful for investors who are planning to sell their property and whose interest payments can be tax deductible.
• Good for some first home buyers who want to alleviate some financial burden after enduring the costs of buying a home. Read about the hidden costs of buying a home.

Disadvantages

• You are not paying off the loan itself.
• The principal amount sits and accrues interest, meaning you end up paying more over the term of your loan. Use Lendi’s Repayments Calculator to figure out how much extra you could be paying if you choose an IO loan.
• You may not be prepared for the rise in repayments when your IO term ends.

Principal and interest

If you pay principal and interest (P&I) on your loan you are paying both the interest charged and the loan amount itself with each monthly (or fortnightly) repayment.

Advantages

• You are actually paying off your loan (not just the interest).
• Potential to own your home outright sooner.
• You will pay less interest over the life of your loan.

Disadvantages

• The initial monthly repayments are higher than an interest only loan.

If you wish to own your home sooner, P&I loans are the ideal way to do so. The quicker you can pay off the principal amount, the less interest you will be charged. This means that you can save time and money over the term of your loan.

7 tips to pay off your home loan faster

The dream of financial freedom can become a reality by paying off your home loan. To trim years off your home loan, consider the following tips to save you both time and money:

1. Make bigger payments more often. The main goal of reducing your home loan is to pay off the principal amount as fast as you can. Consider making larger, automated payments that are directly debited from your account. By decreasing the principal amount of your home loan as early as possible, you will minimize the amount of interest charged. The most amount of interest is paid within the initial years of your loan because your principal amount is at its largest.

2. Utilise your home loan features. If you have a variable interest rate home loan that offers offset accounts and redraw facilities, take advantage of them. The balance within your offset account and redraw facilities offsets the amount of interest charged on your home loan. Offset accounts work as everyday transaction accounts, so you always have access to your extra finances if you need them. Redraw facilities allow you to make overpayments on your home loan, with the excess amount being stored in your redraw facility that you may access (with strict regulations) if financial distress occurs. Both of which are great was to minimise the interest paid on your home loan. Use Lendi’s Home Loan Offset Calculator to see how much you can save by utilising your offset account.

3. Consider refinancing. Consider switching lenders or home loans for more competitive rates or added features that could save time and money off your home loan. Make your current lender aware that you are shopping around for home loans, and they may offer you a lowered rate. By having a lower interest rate, you may be able to afford making large repayments on your home loan.

4. Put any extra cash straight into your home loan. Forget that shopping spree you were going to do with your tax return, instead, put it straight towards your home loan. The same goes for any bonuses, inheritances or dividends from investment properties or stocks.

5. Being frugal isn’t a bad thing. Like the above point, putting any extra money towards your home loan will get you further to the finish line. Consider reworking your budget so that you can afford to make higher payments on your home loan each month. This may mean cutting out luxury items, take out, or your daily barista made coffee. This can be one of the simplest, yet most challenging steps, but always remember your end goal. Consider meal prepping to minimise the temptation to buy lunch or buying alternative brands when grocery shopping.

6. Rent out space. Don’t underestimate the monetary value of every square metre you own. Whether it’s a spare bedroom, a granny flat, or car space, by renting out spare space you could be gaining extra cash flow that can help you make large payments on your mortgage.

7. Work with interest rates. If your interest rate has dropped, don’t drop your monthly repayments. Take advantage of low interest rates and pay as much as you can during this time.

Paying off your home loan sooner means that the cloud of looming debt is alleviated. Reach financial freedom quicker by regularly reviewing your home loan, the features it offers and what rate you’re being charged.

The next step is making a plan to make extra repayments on your home loan to achieve your goal sooner. By shortening your loan term, you can potentially save thousands of dollars in interest.

For advice on how to pay off your home loan faster, speak to one of Lendi’s Home Loan Specialists today.