Mortgage freedom

In Australia, the standard mortgage term is thirty years, but the average time to pay it off is closer to twenty-eight years. As Australians are qualifying for mortgages later in life, this presents quite a unique challenge. No one wants to be still paying off their mortgage at sixty-five. As a result, many are eager to pay off their loans as quickly as possible.

It’s entirely possible for an average person to become mortgage-free faster than the term of their loan. This approach saves on interest and doesn’t require complex strategies. All it takes is consistency and a basic understanding of how your mortgage product actually works.

When it comes to paying off your mortgage faster, there are two main strategies. The first is an offset account, which many people have heard of but may not fully understand. An offset account is essentially a savings account linked to your mortgage, where the balance of the savings reduces the interest you pay on the loan.

In Australia, interest on mortgages is calculated daily, but most people pay it monthly. An offset account gives the bank more confidence in your financial reliability. For example, if you owe half a million dollars on your mortgage but have managed to save fifteen thousand dollars in your offset account, the bank sees that fifteen thousand dollars as available to reduce your debt. In other words whilst that money is in your offset account, you are fifteen thousand dollars less risky. It is a benchmark for how reliable you are. 

Satisfied that you are financially reliable, they subtract the balance of your offset account from your mortgage balance when calculating interest. The larger the offset balance, the less interest you’ll pay. For example, without an offset account, you’d pay interest on the full half a million dollar mortgage. With fifteen thousand dollars in an offset account, interest is calculated on only four hundred and eighty five thousand dollars, as the bank sees the extra funds as part of your mortgage payment.

Using an offset account is a highly effective way to save on your interest expense. Since less of your mortgage payment goes toward interest, more goes toward paying down the principal, helping you pay off your loan faster. For example, if your mortgage payment is a thousand dollars, an offset account allows a larger portion of that total monthly payment to reduce your loan balance instead of covering interest charges. Of that thousand dollar payment, three hundred of it may be interest charged. With an offset, it can be heavily reduced. Instead of seven hundred dollars going to the principal, it could be nine hundred dollars.

An offset account is a great option for mortgage holders who want to save while repaying their loan. It offers flexibility, allowing you to withdraw funds when needed, for example, to cover unexpected expenses like car repairs or a new fridge. However, not everyone has extra money to set aside. Nearly half of all working Australians are estimated to be living paycheck to paycheck, meaning many mortgage holders may struggle to use an offset account effectively.

Banks calculate mortgage interest daily, but most people make payments once a month. By the time you make your payment, interest has accumulated over the past 30 days, adding to the total cost of your loan.

Switching to fortnightly mortgage payments can significantly reduce your interest expense. Instead of letting interest build up over an entire month, you pay it off every two weeks. This means you’re reducing the principal twice a month rather than once, which helps lower the overall interest charged. Simply switching to paying every fortnight can wipe 7 years off of the average mortgage. 

There is no need to pay extra. It is enough to just split a monthly payment in half. For example, if you normally pay fifteen hundred per month, you would instead pay seven hundred and fifty every two weeks. Since there are 26 fortnights in a year, this results in an extra full month’s payment annually, which helps reduce your loan term. 

Someone doesn’t need to earn a fortune to pay off their mortgage, they just need to use the right tools. It’s not complicated, difficult, or even more expensive. And it’s absolutely worth the effort. After all, nobody wants to be paying off their mortgage in their sixties.

Disclaimer: The information in this article is general in nature and does not constitute financial advice. It is for informational purposes only and does not take into account your personal circumstances, financial situation, or needs. Before making any financial decisions, consider seeking professional advice tailored to your specific situation.