How to pay

off your home

loan fast

Congratulations, your home loans finally approved!

But while its okay to have a loan now, your ultimate goal is
financial freedom. You dont want to live the rest of your life
heavily in debt, right? Your aim is to pay off your loan and be
debt-free as much as possible.
We know that the 25 or 30 years in your contract seem pretty
much a long time away from now. Its a long time before you
hold in your hands on the deed to your property. However, do
not worry. There are various ways you can take to pay off your
loan faster while allowing you to save money in the process.

Gordon Wealth Tip

1. Save on interest payments
The truth is that when you pay off mortgage early, you
can save thousands of dollars in interest. It may seem
complicated but the process is actually simple and very
possible.
You first need to know how your repayment is calculated.
The minimum monthly repayment for a principal and
interest loan depends on how much is needed to be paid
every month to pay off the balance of the loan or principal
over the loan term, including the interest accrued on that
balance.
Typical loans last for around 25 years, but you can have
a lesser or even longer repayment period depending on
your loan. The shorter the term, the higher is the monthly
minimum payment.
It is usually recommended to agree on a 25 year term
even if you have the financial means to pay if off in 10 or 15
years. This gives you more flexibility and security against
unforeseen events in the future, and also gives you a lower
monthly minimum repayment as the amount is computed at
25 years, not less.

2. Understand principal and interests

Unless interest rates change, the amount of your loan
repayment should remain constant. Any changes would
be in terms of the ratio between the principal and interests
payments, that is, how much of your repayments go to
the principal amount and how much are charged to the
interests. Typically, majority of monthly repayments go to
the interest, while the remainder is paid off to the principal.
However, as the principal is paid off, interests costs also
decrease. Eventually, most of your repayments will be
spent paying off the principal and the remaining portion on
the interests.

3. Make extra repayments

One of the ways to easily pay off your loans is by making
extra repayments. Even more, you also pay off less in
interest, therefore, letting you save thousands of dollars.

Heres an example. Say you took a principal and interest

loan for $150,000 for a 25-year term and with an interest
rate of 6.50 percent per year. Let us also assume that your
loan is fixed, therefore the interest rate is not going to
change in the course of the 25-year period.
If youre sticking to only your monthly minimum payment,
by the time you make your last repayment of the loan, you
would have paid back the full amount of the loan, BUT you
would also have paid roughly $153,800 just for the interest.
This is the same amount as your original loan, if not more,
and you could have already put away half of this as savings
if you made extra repayments.
If you can pay off your loan in just 20 years, you would
be paying only $118,400 in interests, allowing you to save
$35,400 a significant amount still if you can finish off
your loan five years earlier. Now, if you can pay it even
faster, say 10 years, your interest payments will be even
lower at only $54,000. This means saving up to $100,000
from interests alone!
Heres another example of how you can save on interest
repayments on a $450,000 loan with a 4.50 percent
interest per year.
Loan Term (Year)
Interest Repayments

25
$300,375

20
$233,260
$67,115

10
$109,647
$190,728

Savings

Our sample computations show that it is important to plan

wisely your financials before you take out a loan to see
how long you wish to be paying a debt and the projected
savings you intend to make. In the succeeding sections,
well tell you about some of the loan products available to
you.

4. Organise a budget
Ask yourself, What are your long-term plans? How do
you plan to achieve them? Just as acquiring a property
is a major commitment, then so is working out a plan to
achieve your financial goals. Without a plan, how would
you be able to get from point A to point B, from being a
borrower to being financially secure and free? Just as it

is easy to spend a few hundred dollars on your mortgage

every month, then surely, it is also easy to motivate yourself
and draw up a plan that can help you achieve your financial
goals.
There are a number of ways to do this, but here are two
ideas.
First, sit down and work on your personal budget.
Determine your total monthly after-tax income, or the
money you will be getting after tax deductions have
been made, and then subtract from here your monthly
basic expenses, including your monthly minimum loan
repayment. In your expenses, consider also other lifestyle
expenses such as gas/transportation costs, travel and
holiday costs, as well as one-off annual expenditures such
as insurance.
The remainder of the amount will be your savings. From
here, you can devise a way to see how much more time
and money you need to earn and save to pay off the
remainder of your loan.
Use Gordon Wealths mortgage calculator tools to help you
create your budget and calculate your loan repayments!
Just key in your loan amount, terms and interest rate and
youll be provided with an approximate amount of what you
need to pay every month.
The second option is to identify the maximum time you
want to be in debt. If youre agreeable to paying off your
loan for a period of 10 years, then you can work out loan
repayment terms that are good for 10 years. The shorter
the maximum time you wish to be in debt, the faster you
will be able to achieve your dream of financial freedom and
success and be debt-free!

5. Get the right loan

One of the secrets to saving a huge deal of money
is getting the right loan that is best suited to your
circumstances. In choosing your loan, make sure that
you have a clear understanding and knowledge of your
financial capacity and goals.
For example, fixed rate loans and interest-only loans do
not offer the same flexibility. Lenders typically provide
a maximum amount of extra repayment that you can
make without extra fees. This is usually around $5,000
to $10,000 every year. Similarly, extra repayments are
not usually allowed when you take out honeymoon or

introductory-rate loans. To be sure, it is best to consult with

your lender the provisions and limitations that your loan
product might have.
On the other hand, variable rate loans allow you to make
extra repayments with no additional costs. With this type of
loan, you will not be limited in terms of the amount you pay
or in the frequency of extra repayments you make.
If you are interested in these variable rate loans, here are
a few features that you may find useful and beneficial if
youre aiming to pay off your loan earlier than the indicated
terms.
Redraw facility. A good feature of a flexible loan is the
redraw facility that lets you put money left over on a regular
basis into your loan, and then use these funds anytime you
need to. It is also cheaper in terms of interest, although it
is advised to limit only the amount of extra money you put
into the loan.
This feature is generally part of loans that target low to
medium-income earners as well as those who need help
budgeting or saving money. This is the left-over money
added into the loan acts like savings, which may be
redrawn if you need cash.
Offset loans. This loan product sets up a 100 percent offset
account that acts as a separate account from the homeloan account. It functions like a transaction account with an
interest rate that is similar or equal to the one charged to
your home-loan account.
Say your loan balance is $120,000 the interest is usually
calculated on a daily basis and charged to the account
every month. With a 100 percent offset account, you can
place your earnings here and the balance of your savings
($10,000) is then used to pay off the balance of your home
loan. With this, the principal home loan amount is reduced
to only $110,000 and you pay interest only on this reduced
amount.
A similar feature to the 100 percent offset loan is the partial
offset account, in which case you offset the home loan with
the difference between the interest charged on your home
loan and the interest earned on your savings account.
All-in-one loans. Consolidating your loans is one of the
ways to effectively raise your credit score. You can avail of
all-in-one loans that allow you to combine all your accounts
(savings, cheque or loan) and automatically enrolls your
pay and other sources of income into the same account. As

a result, your total loan is decreased, effectively reducing

also the amount of interest. If you want to pay off your loan
regularly and ensure that you dont miss out payments on
any loans, all-in-one loans that consolidate your debt are a
good choice. You can keep the maximum amount of money
in your loan account for as long as possible because
interest is calculated daily but charged monthly.
An added advantage of this feature is that it also lets
you enroll a credit card. Use the credit card to pay your
expenses just before or after your monthly income has
been added to the all-in-one account. In this way, you
can keep most of your money in your loan account, earn
additional points and rewards on your card while saving on
interests payments on your credit card because of interestfree days.
While these all-in-one loans have generally higher rates
and fees, they are also however more flexible and allow
you greater control and better management of your funds
and loans at the same time.
All-in-one and offset loans are some of the loan products
that offer features such as using your mortgage as your key
financial product and your savings as a way to cut down
on the interest you pay. By simply opening a mortgage
account that consolidates your income for paying off your
monthly expenses, or using a credit card, you can make
small but significant leaps in paying off your loan and being
one step closer to financial freedom.

6. Use credit cards the right way

Your credit card is not only for shopping sprees but it can
also be used to pay bills, so you can hold on to your money
in your offset account longer. The longer that your money
stays in your offset account, interest is calculated at a much
lower home-loan balance, whereas if you take your money
out of your offset account, then interest is computed at a
higher amount.
For convenience, you can enroll your major bills on your
credit card and use it especially for settling bills on interestfree days. You also get to earn additional reward points!
To avoid credit card bill debt, you can pay your credit card
out of your offset account before the interest-free days
end. Youll be holding on to most of your money in your
offset account (youll be using a particular set amount
only to settle your credit card bill) and having your interest
calculated against a lower loan balance.

7. Explore lines of credit

A line of credit may be used for items like a renovation
since you only pay interest on the money that you used.
Think of it as a chequebook where you pay interest on the
total amount of cheque youve used, not for each individual
cheque issued. A line of credit, also called as equity line
or equity loan, sets a borrowing limit that you can use all at
once or one at a time.
Heres an example. Say, you have a line of credit of
$200,000. You can use this in one go or in installments,
like spending $50,000 on a home repair, an appliance
purchase, depositing it in your savings, or even using
it to buy stocks. When you take this money, also called
drawing down, the interest is calculated only for the
amount you spent $50,000 not the entire $200,000 in
your line of credit.
If, for example, you want to take out an additional $70,000
for another major purchase, such as an overseas trip or
a house extension or renovation, the interest would be
calculated based on the total money drawn $120,000
(the first $50,000 and the second $70,000). If you dont
decide to spend the remainder of the money in your credit
line, then you wont have to pay any interests for it.
With a line of credit, you can also split a loan between
several products or change your loan according to what
suits your needs. Borrowers can split their loan into two,
for example a redraw facility for $180,000 and a line of
credit for renovations in your property at $30,000. If youre
done with the renovations and have paid off the line of
credit, you can also add that amount into the redraw facility,
consolidate your loan, cancel the line of credit product, and
get a lower interest rate computation.

8. Understand equity
Equity is earned with every payment you make on your
home loan. This is the difference between the current
value of your property and the amount you owe your
lender. The more payments you make, the higher your
equity is.
But, you can also take advantage of this equity to borrow
money for other purposes such as other renovations on
your property. For example, you can use your equity as
collateral to borrow more funds to add another bedroom
in your home, retile the bathroom, or add a garage.

Renovations such as these can increase the value of your

home especially if youre looking to move to a new one
and thinking of selling your current property. If you can
get a higher sale price for your property because of these
added renovations, you can pay off the initial mortgage
faster and at the same time, allow you to have greater
equity in your new property.

9. Check other home loan packages

Our lenders have a variety of financial products you can
choose from.
Discounted home insurance
Fee-free credit cards
Free consultation with a financial advisor
Fee-free transaction account
These are some of the products and services our lenders
have to offer. While these are little things compared to what
youre already paying on your home loan, these little things
count and can go a long way in helping you tuck away a
couple extra dollars as savings that you can use on your
home loan.

10. Pay fortnightly or weekly

Normally, loan repayments are calculated on a monthly
basis. However, there are lenders that allow the option of
repaying your loan on other terms, such as fortnightly or
even weekly. If you pay on these terms, you would be able
to get at least an extra month of repayment every year.
Heres an example. Say your minimum monthly repayment
is $1,200. If you pay this monthly without fail for a year, you
would have made a total of $14,400 in your loan repayment
for one year. However, if you halve your monthly repayment
so that you are paying $600 every fortnight, you will be
making 26 repayments of $600 for each year. Your total
loan repayment then for a year would be $15,600 instead
of $14,400, giving you an extra months repayment.
This extra repayment can considerably bring down your
principal loan amount if you add them all up. If your loan
is $150,000 for 25 years and with an interest rate of 6.57
percent every year, you would be able to pay off your loan
five years earlier and save $52,000 in interests.
Likewise, paying weekly can also bring you the same
savings as you would if you were paying fortnightly.

11. Pay at a lower interest rate

Interest rates are a substantial factor especially if you wish
to save some money. It is important to remember that if
interest rates go down, at least your repayment doesnt go
down. Maintain your repayment even if the interest rates
go own so you can build equity in your property quicker
and save more money in interest payments.
Refinancing your loan at a lower rate can also help you
save in terms of interest rate without changing the amount
of your repayment. So, by continuing to pay at your old
higher terms, you can pay off your loan the soonest time
possible. As example, if your current loan is $150,000 and
with an interest rate of 6.57 percent, you can refinance it to
5.97 percent but still make the same monthly repayment at
the original 6.57 percent rate. Youll be able to finish your
loan at least 3 years earlier and save at least $35,800 in
repayments alone!
The beauty of refinancing your loan is that you dont also
need to change lenders as most lenders are more than
willing to give you a loan variation that lets you change
your loan product to another with only a minimal fee ($100
to $300 which can be paid in installments).
Check with your lender the cheapest product thats perfect
for you without the bells and whistles and other trimmings
that you dont need. Alternatively, you can also get the
services of a broker youve used before to check with your
current lender the charge for changing loan products.
If you decide to change lenders, see about other
incentives that you can get for you and your property. You
can, for example, ask if you can get half a percentage point
off their offered rate, or a break on establishment costs or
ongoing fees.

12. Cutback on minor luxuries

Having a loan requires some sacrifice in your lifestyle.
You might not want it, but you need to understand that in
order to be able to pay off your mortgage and still afford
the basic necessities, you will need to cut back on some
of your luxuries. Unless youre a professional investor who
has enough cashflow to move around, it is smart to use
whatever extra money you have to paying off the principal
of your loan and saving money in the long run.

Look at your monthly budget and see the difference you

can get when you make extra repayments on your loan
and the additional savings if youre able to repay it faster.
How much money do you need to be able to make those
repayments? Then, look at where you can get that amount
from your monthly budget. You will see that by cutting
down on some luxuries like a weekly massage, dining
out in restaurants, or even a car magazine subscription
youll be able to save the money needed to make extra
repayments.
Alternatively, you can also consider this cutting down on
luxuries and vices as a way to have a healthier lifestyle. If
youre a smoker, use the goal of paying off your mortgage
fast as extra motivation to quit smoking. All that money you
would otherwise spend on cigarettes can go into making
extra repayments of your loan. Its considerable savings,
actually. Say, you smoke three packs every week you
spend about $117 every month on your cigarette packs and
roughly $1,4004 every year. Add this monthly savings from
your ciggies and youll be able to save over 5.4 years off
your mortgage and about $66,350 in repayments.

13. Check out professional packages

To save more and get the best deal out there, try to ask
your lender or broker about a professional package that
gives you more savings and discounts. Large lending
institutions usually offer packages and discounts if your
loan exceeds a certain amount, usually over $150,000.
And if youre worried about needing to be a white-collar
professional to avail of these, dont be. Lenders dont
usually label them as professional packages.
The discounts you can get from these packages are
considerably significant, usually between 25 basis points
and 70 basis points off the interest rate.

A passive but excellent source of extra income is rent from

your property. Your tenants rent can go into paying off
the loan, which frees you up from the stress of getting the
money from your other monthly earnings.
You also wont need to make very drastic changes in your
lifestyle as you have a passive income source such as
rent that automatically assures that you have the money
to make your monthly repayment. If this passive income is
quite substantial, you can use the amount to make extra
repayments and therefore finish off the loan much quicker.

15. Structure and/or consolidate your loan

Structuring or consolidating your loan can also bring you
substantial savings.
If you own two properties, say the one you live and another
one that you are renting out, you may find that you may
get tax benefits from the latter property but not from the
property where you live. It is then strategic to pay off the
property where you live first and enjoy the benefits you get
from the property youre renting out.
To do this, you can structure your loan on your investment
property into an Interest-only loan. This will give you extra
funds from your normal principal and interest repayment
and then use these funds to pay off your loan in the
property where you live.
Heres a sample computation. If you have a loan of
$150,000 on your investment property at 6.57 percent
interest for 25 years, your monthly repayment would be
$1,010. If you restructure this loan into an interest-only loan,
your repayment would be reduced to $821 per month,
which gives you an extra $198 that you can add to your
repayment for your other loan.

Avail of these packages and get a good deal with just a

quick phone call to your broker or lender.

Once youve paid off your first loan, you can then revert
the Interest-only loan into the normal principal and interest
loan.

14. Have double of multiple incomes

Rising interests rates can also rack up your repayment

amount, because with each increase, your loan payable will
also increase. In addition to your home loan, other sources
of expenditures such as your credit card will also increase.
In fact, it is possible that the interest you are paying for
your credit card and other personal loans may be even
higher than your home loan.

You can also pay off your loan quickly by having multiple
income streams. An additional source of income that
gives you the funds to pay off your loan wouldnt hurt. You
can use the earnings from one for your daily necessities,
and the other for simply paying off the mortgage on your
property.

One way to cushion yourself from these rising interest rates

is to consolidate your loan under your home loan. So for

example, instead of paying 15 percent on your credit card,
you can consolidate this credit card debt to your home
loan and slash by half the interest rate. Another similar
option is refinancing, which can get you a better interest
rate. Check with your broker what might be the possibility
of consolidating or restructuring your loan, and additional
costs entailed if you do so.
Remember, however, that consolidating or restructuring
your loan is simply transferring your debts into one with a
cheaper interest rate. This doesnt pay off all your loans.
You will need to cut down on the use of your credit card to
avoid racketing up the amount of your loan.

16. Use GST if youre self-employed

Offset accounts are perfect for self-employed individuals
and those who do not have a stable source of income. If
you are self-employed, you may want to put the money you
save into an offset account for your home loan. The longer
your money sits in this offset account, the more that your
interest is calculated at a lower rate. When it is time to pay
your quarterly GST, you can transfer the funds back into
your business account and then start saving up again for
the next quarter payment.
Check with your accountant to see how you can make the
best out of this arrangement.

17. Make your loan portable

Unexpected circumstances such as a change in jobs,
marriage or other personal issues may cause you to move
out of your current home into a new one. If you still have
years to pay on your current home, check with your lender
or broker if you can transfer your existing loan to the new
property and if the terms will remain the same.
It would help if you can secure a portable loan at the very
start to ensure for such possibilities, otherwise you might
find yourself caught up with paying discharge costs for
your old loan and administrative fees for the application of
a new one. If you can carry over your existing loan to a new
property, it would save you tons of hassle and most of all,
money.
Make this an important consideration when you apply for a
loan.

18. Pay all mortgage fees and charges up front

Your lender may offer to add to your loan amount other
charges for the loan application, such as establishment
fees, valuation fees and lenders legal costs. This may
seem less hassle, but it will cost you more in the long-term,
so avoid agreeing to this if you can. It is always best to pay
up front these charges and maintain the original principal
and interest loan amount.
Likewise, you may want to make your first payment earlier
than the due date. Typically, most lenders do not expect
borrowers to make the first payment 30 days after the loan
settles. The longer this money is in your account, the lower
the calculation of the interest. On the 2nd anniversary of
your loan, you may want to make double payments for that
particular month, and so on.
Point is, the more payments you make, the faster youll be
able to pay your principal, and the more savings youll be
able to make from lower interests costs.

19. Post mortgage

Continue the practice of saving money for other future
investment even if youve already paid off your mortgage.
Once youve settled your loan, you will realize that you
have extra money. If youre okay with sticking to your
changed lifestyle, something that was a necessity when
you were paying off your mortgage, you may want to tuck
away that extra money as savings or as investment fund.
This way, when you see an interesting property in the
future, you wont need to take out a big loan as you already
have some seed money to use for paying off part of the
propertys value.
Owning a property is a serious commitment, one that
requires proper planning on your part. But, more than ever,
it also necessitates changes in your lifestyle if you are
serious about investing while at the same time ensuring
that you are able to meet your daily needs to survive.
Indeed, what good is a nice two-storey house in the
suburbs if youre eating shredded newspaper and making
your own dog food? Sacrifices in little luxuries can go a
long way to helping you save the money you need to make
those repayments, and eventually give you a debt-free life
with your own house to boot!
Likewise, if you come across an unexpected financial
windfall, dont blow it off at the casino in one night! Nothing

is as great a waste as losing a big commission or bonus on

lottery that pits you against all the odds. Why not enjoy half
of it and put the other half into your mortgage or savings
for future investment?
Finally, dont forget to regularly check with your broker or
lender the loan products and options available that can
save you on interests costs. With options like refinancing
and consolidating, it is now so easy to restructure your
existing loan with less stress, less costs and more savings
for you in the long run.

For more info visit

GordonWealth.com.au