When most of us take out a home loan, whether for an investment property or a first home, the lender puts us on a 30-year payment plan. The thought of being in debt for three decades and not owning our property outright until we’re 30 years older can be a daunting one, but luckily there’s a number of ways to pay off your property sooner.
Whether you’re paying off your first home or an investment property, a little can go a long way when it comes to reducing your debt. So consider these options if you want to pay off your mortgage faster, minimise your interest repayments and your home sooner.
1. Use your extra savings
If you’ve already started to build up your investment property portfolio, chances are you’ve got a little extra money coming in. While it may be tempting to treat yourself once in a while, now’s the time to use those extra savings to start paying off your debt and get closer to owning your properties outright. While this may not seem like the most thrilling way to use your extra savings, it can take years off your home loan and your future self will be eternally grateful.
2. Set up a mortgage offset account
An offset account is a way to link one of your transactional bank accounts to your home loan account. This way, you can pay off your loan with your savings and also pay less interest. For example, say you have a home loan of $600,000. If you put $30,000 into an offset account you’ll only need to pay interest on the remaining balance of $570,000.
The more money you have in your offset account, the less interest you will have to pay on the loan, which means you’ll have more money to put towards paying off the principal.
3. Switch to fortnightly payments
One of the smartest ways to easily pay off your investment property home loan faster is by switching to fortnightly payments. This works by splitting your monthly payment in half and paying it every two weeks. Since there are 26 fortnights in a year but only 12 months, you’ll end up making the equivalent of 13 monthly payments every year.
The best part about this one is you’ll barely notice the difference in the moment, but as the extra payments accumulate, they could shave years off your home loan.
4. Make additional lump sum payments
Making additional lump sum payments can have a substantial impact on both the length of time it takes you to own your property outright and the amount of interest you pay, especially during the early years of your mortgage.
Say you’ve received an inheritance, large tax return or gotten a big bonus at work. Rather than going on a spending spree, put it towards paying off your home loan. Using even a portion of the amount can take an impressive amount of time off your mortgage and save you a considerable amount of interest too
5. Find a lower interest rate
There are many reasons to reconsider your home loan, and switching to a home loan with a lower interest rate is a very effective way of paying off your property faster. If you do manage to find a better rate elsewhere, always ask your current lender to match it or make a lower offer. This way, you can save interest and avoid the fees that come along with changing loans. Rather than pocketing the money you’re now saving on interest, put it towards your mortgage and own your home outright faster and cheaper.
6. Avoid reducing your payments
When variable interest rates fall, many people find it tempting to reduce their payments and pocket the savings. However, by keeping your payments as they are you’ll pay off your loan sooner.
Alternatively, if your rates are staying steady you may want to consider increasing your repayments. Whether it’s as little as $50 a fortnight or something more substantial, it’ll build up over time and accelerate your pathway to owning your property outright.
7. Utilise tax benefits
Purchasing the right investment property can offer some major tax benefits that can save you thousands, which can then be used to pay off your loan at a much faster rate. Some of these benefits include:
Depreciation is the lowering in value of your property over time. Depreciation can be a huge tax advantage as it is an on-paper loss, as opposed to money coming out of your pocket. At the end of the financial year, you can claim the lowering value of your property against the money you have coming in. After you get your tax return back you may be able to turn your negatively geared property into a positive one, or make an already positively geared property almost tax-free.
Claiming interest on your mortgage
Because the interest you pay on your investment property is incurred through making money via property, it becomes tax-deductible. When the end of the financial year comes, put your savings towards paying off your mortgage.
Repairs and maintenance
Any repair or preventative work done on your investment property can be claimed as a tax reduction. Rather than keeping these savings, use them to pay off your mortgage and over time you can cut a considerable amount of time off your loan.
Rates and management fees
Just like repairs and maintenance work, the rates and management fees associated with your investment property (like land tax, accounting fees and council rates) can be claimed as an immediate deduction for homeowners. Again, rather than pocket these savings consider putting them towards paying off your loan.
While some of these tactics may seem anticlimactic or too insignificant to make a dent, you’d be surprised at how far they could take you. Implementing even just a few of these strategies could take years off your home loan and bring you closer and closer to that sweet day when you own your home outright.