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3 easy ways to cut your mortgage

Australians now owe more on their mortgages than ever before, with the average home loan leaping to $433,000 in June 2014 – a rise of 10% in a year.1  But with just a few easy steps you can take years off your loan and thousands off the interest you pay.

If you’re not looking forward to the prospect of many decades paying off your mortgage, there’s some good news. With a few easy changes to the way you manage your home loan and repayments, you can cut the amount of interest you pay – and pay off your home loan sooner.

Step 1: Make the most of low rates

Right now, interest rates are at record lows, with the Reserve Bank’s official cash rate falling to 2% in May. This makes it a great time to get ahead on your loan.

The first thing you can do is shop around to make sure you’re getting a good deal. If you find a lower rate, ask your bank to match it – and if they don’t, consider switching to a new loan.

Then – and this is the important part – once you’re on a lower rate, keep paying the same amount off your loan, rather than reducing it to the new minimum repayment. This way the extra money you pay goes straight to the loan principal, reducing your balance faster and saving on interest.

This strategy also works when your bank lowers your interest rate in line with the official cash rate. Just keep on paying what you’ve always paid, to pay down your balance faster.

Step 2: Pay off a little more

In the early years of your mortgage, most of your repayments simply go to paying off interest. So it makes sense to pay off as much as you can now to reduce the total interest you’ll pay. And while it can be hard to find extra cash for repayments, it’s worth it in the long run. And the best part is your wallet won’t even feel the difference.

  • Make fortnightly payments. If you’re making monthly repayments on the loan, you might consider paying half the amount each fortnight. So for example, rather than paying $2000 a month, you’ll make two payments of $1000 each. While this doesn’t seem like a big change, it’s a simple trick that will actually mean you make one extra monthly repayment a year – with 26 fortnightly payments rather than 12 monthly ones – saving you in interest and reducing your loan.
  • Round up your payments. It may not sound like much, but rounding your repayments up to the nearest $100 or even $500 may not affect your finances in the short term, but will really pay off in interest savings. For example, paying around $30 a week extra on a 30-year mortgage of $300,000 at 7% p.a. could see you knocking almost five years off the term of your loan.2
  • Increase with your income. Every little bit helps. So when your income goes up, why not increase your mortgage payment? If you get a 10% raise, boost your repayments by the same percentage – the extra will go directly towards paying off the principal.

Step 3: Reduce the life of your mortgage

Did you know that, over a 30 year loan, you could end up paying more in interest than the original value of the loan? For example, on a $300,000 loan at 7% p.a., you could pay $418,5273  in interest over the 30 year term.

So if you can manage it, choosing a shorter loan term can reduce the amount of interest substantially. In the case of our $300,000 example above, by reducing the loan term to 20 years, you could save over $160,000 in interest.

What’s more, shorter-term loans usually have a lower interest rate, helping you make even bigger savings.

Find out more

Everyone’s financial situation is different so it’s best to get professional advice tailored to your mortgage.

1. AFG Mortgage Index, Investor activity heats up in QLD as NSW comes off all time high: latest mortgage data, July 2014
2. NAB Loan Repayments Calculator
3. ASIC MoneySmart Mortgage Calculator


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