12 Mistakes To Avoid When Paying Off Your Mortgage Early
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One of the things you might have wondered as an Australian expat and home loan borrower is how to pay off your mortgage faster. There are many advantages and financial benefits to paying off a home loan sooner, such as having more financial freedom and owning your property earlier, which might be an investment property.
There are several methods and approaches you can use to achieve this, but what you will need to consider are the many mistakes to avoid when thinking of approaches related to how to pay off your mortgage faster. Making mistakes when paying off your home loan sooner can actually lead to financial challenges, such as being cash poor (which we will discuss in this article).
So, to learn which mistakes you should avoid when paying off your mortgage sooner, start reading this article!
What is meant by paying off a mortgage early?
The first thing we will quickly discuss before we get to the mistakes is what is meant by paying off a mortgage early.
Now, paying off a mortgage early refers to the moment you own your house outright. It means that you have not only paid off the principal amount of your home loan, but that you can significantly reduce the home loan interest amount requested by the lender over the loan term to the extent that you can become a homeowner much earlier.
Which approaches should you use to pay off a mortgage loan sooner?
What you might be looking for is advice on how to pay off your mortgage faster, and there are several methods and strategies you can take to achieve this as an Australian expat returning to Australia or looking for a home loan from abroad. To cover a few of them here, here are a few ways to pay off your loan sooner.
1. Ensure you have an excellent credit rating
An excellent credit rating will help you to secure a better, more competitive interest rate for your home loan, so work towards improving your credit score to give yourself the chances of receiving the best interest rate possible. We’ve got an article on How to Improve Your Credit Score and How to Check Your Credit Rating, so check this out for all the facts you need on this topic.
2. Make sure your interest rate is competitive
If you already have applied for a home loan, check that the interest rate is competitive when compared with the other lenders. A better interest rate can help you pay off your mortgage faster. You might choose to switch loans from your existing bank or current lender to achieve this and therefore begin to compare home loans in detail.
For instance, your lender might have offered you an interest rate of 4% for your particular financial situation, but when you compare home loans in depth, you might find that other home loan providers offer you 3.75% interest rates and choose to switch loans to reap the benefits.
Get a free Australian mortgage assessment today.
3. Contribute a lump sum or make a lump sum repayment
When you earn an additional lump sum payment, make sure you use this to your advantage for paying off your home loan. Additional payments towards your home loan can be critical if you are looking for answers to how to pay off your mortgage faster, and the payments that go towards your principal loan amount will help reduce the interest you pay in the long run.
Of course, if you get regular bonuses at work or gain a lump sum regularly (such as from a tax refund), this will be even better for your financial situation and reduce both your principal and interest amounts on your home loan.
12 mistakes to avoid when considering how to pay off your mortgage faster
Recognising how to pay off your mortgage faster is all well and good, but it’s vital that you avoid making mistakes in the process. If you’re not sure what the pitfalls are when it comes to paying off a mortgage early as an expat, here are twelve of the most important mistakes you must avoid when paying off your mortgage early.
1. Failing to choose a favourable loan term
The first factor that you really must pay attention to when choosing a relevant credit provider or mortgage broker for your home loan is the interest rate. If you forget to factor in the interest rate, this is a mistake.
But here’s why the interest rate is so important. If you can get a competitive interest rate, you can get a lower minimum repayment amount.
Let’s make this point clearer. Here are two scenarios as example calculations.
In scenario A:
- You have a $150,000 home loan
- You must pay interest at the rate of 4%
- Your loan term is 20 years
- You make extra contributions of $100 each month
- Your minimum repayments will be $908.97
In scenario B:
- You have a $150,000 home loan
- You must pay interest at the rate of 3.75%
- Your loan term is 20 years
- You make extra contributions of $100 each month
- Your minimum repayments will be $889.33
So, when we look at the difference between the above scenarios, a lower interest rate of 3.75% will give you a lower minimum repayment of $889.33 when compared with the higher interest rate of 4%, which will give you a higher minimum repayment of $908.97 per month.
With a lower minimum repayment, you’ll find it easier to make monthly repayments and pay off your mortgage early.
2. Forgetting to specify that additional payments are for the loan principal
You might be making additional repayments from abroad as an expat, but are you paying towards the right portion of the home loan–i.e., the principal amount?
Since your lender might use your additional repayments for the interest part of your loan, it’s important that you don’t forget to specify which portion of the loan the payment is scheduled for.
Now, the main reason you’ll want to ensure your additional payments are for the loan’s principal amount is that you can solve two problems at once using this approach. You can reduce your principal amount AND the interest charges that apply to your home loan.
When you reduce the principal and interest amounts, this is key to paying off your mortgage faster, and reducing the home loan’s life, so avoid the mistake of not specifying that additional amounts are intended for the principal amount.
3. Not being aware of payment penalties when thinking how to pay off your mortgage faster
Mistake number three is making extra repayments but being unaware that a penalty might apply for making those extra repayments. Here’s a little more on this.
You might have applied for a fixed rate loan for which your lender prohibits extra repayments and charges you a penalty for paying them. The main reason for these extra payment penalties is that you might end up causing the lender to lose money. So, for the lost profits, a financial lender will charge you a penalty.
What’s crucial for avoiding this mistake when thinking of how to pay off your mortgage early is to always check the agreement you have with the lender. In circumstances where your loan type permits unlimited extra repayments, you can make additional repayments without consequence.
4. Ending up cash poor and lacking spare cash
So, we’ve established that paying off your mortgage with additional payments and using aggressive repayment strategies to be mortgage-free earlier is a good thing. However, it can potentially be good and bad. It’s more than possible to pay off your home loan this way, but it’s possible that you end up cash poor.
This is mistake number four. Being cash poor means pushing all your funds towards your mortgage and being unable to cover any other potential costs in an emergency situation.
Now, say you accidentally get injured, or are made redundant at work. In these circumstances it’s handy to have a little bit saved to contribute to the costs of paying monthly bills. In this financial situation, however, where you have pushed all funds towards your mortgage, it can be a challenge to have spare cash saved or save money for emergencies.
Bills can end up going unpaid and you might find yourself in a challenging financial situation. So this is why avoiding the mistake of ending up cash poor is critical.
Get a free Australian mortgage assessment today.
5. Not paying attention to the introductory fixed rate period and when it ends
You could get caught out when attempting to complete your home loan repayments. For instance, did you sign a home loan agreement that permits an introductory fixed rate period? And did you take note of when the fixed rate period comes to an end?
It’s important to avoid the mistake of not realising when this fixed rate period finalises, as an expat or even as an Australian resident. When it ends, you will probably be put onto a variable rate of interest which can be higher than the initial period.
It’s also crucial to recognise that a fixed rate period might only last a couple of years with some mortgage lenders, but that opting to switch to a different, better rate during this period might cause you to accrue certain fees from your current lender. So this is an additional mistake to avoid when making mortgage payments and setting up the conditions of the loan.
6. Forgetting to make higher payments on the home loan
Forgetting or failing to increase monthly repayments in terms of the amount you contribute to your home loan is another mistake you must avoid if you want to know how to pay off your mortgage faster. This might seem self explanatory, and for the most part it is.
It can work by helping you reduce the principal portion amount every month that you make a higher repayment amount and contributes to reducing the repayments of your interest rate, meaning you will pay less interest if you can make higher payments.
Making this clear is easier with an example. Let’s look at a scenario where you have a $300,000 home loan.
In scenario A:
- You have a $300,000 home loan
- Your interest rate is 3.75%
- Your loan term is 25 years
- Your extra contributions are $100 each month
- In this scenario, your interest savings will be equal to $15,915
But look at how much you can save if you have additional repayments of $150 each month in this second scenario:
In scenario B:
- You have a $300,000 home loan
- Your interest rate is 3.75%
- Your loan term is 25 years
- Your extra contributions are $150 each month
- In this scenario, your interest savings will be equal to $28,711
So it’s clear from looking at the two scenarios how $50 extra per month can lead to significant interest savings, and this is why contributing extra to a home loan is important.
7. Forgetting to make more frequent payments on the home loan
As an answer to the question “how to pay off your mortgage faster?” you might be unaware that more frequent repayments on your loan can assist you as a resident or an expat, or you might just be unsure how this impacts home loan repayments. That’s a mistake, and it helps to be aware of the benefits of more frequent repayments.
So, what you will want to do is to make more frequent repayments on your home loan balance and be aware of the advantages.
Your options include making monthly payments or weekly repayments to contribute to the principal portion and reduce the interest payable, required by your credit provider or mortgage lender.
8. Failing to take advantage of debt consolidation methods
In the event you need to manage multiple rising interest rates across car loans or personal loans as an expat or resident, which can increase simultaneously in some situations, you must investigate the potential to take advantage of debt consolidation methods. Failing to do this can be another big mistake!
Debt consolidation can significantly streamline your repayments. But that’s not all. Since the interest rates you have on credit cards or car loans can in some financial situations be higher than your mortgage interest rate, debt consolidation can be shrewdly implemented to your benefit.
But beware of a seemingly contradictory mistake, which is that exit fees can apply when you decide to consolidate debts whose interest rates rise and end an agreement with a current lender. In situations such as these, you might fall into the trap of accruing additional fees to your detriment.
Get a free Australian mortgage assessment today.
9. Not being aware of the benefits of an offset account for a home loan
If you’re unaware of the benefits of offset accounts, you won’t be able to reap the benefits! Studying up is important and you can find so much more information in our article: What is a Home Loan Offset Account? But we’ll cover information on an offset account balance briefly here.
Are you aware that an offset account provides a way to link together your transaction bank account or savings account with your home loan? With your savings or transaction account attached, an offset account can help you reduce interest that you have on a home loan thanks to the savings you have built up.
With great savings come great interest deductibility. One very quick example of how an offset account works might apply to the following scenario. In the event you have a home loan of $230,000 and have saved $30,000, you’ll pay interest on $200,000. In the event you have a home loan of $230,000 and have saved $60,000, you’ll pay interest on $170,000. It’s quite simple.
Now, if you keep savings in your offset account for a long period of time, you can make significantly greater savings in terms of your home loan interest repayments.
What’s to be expected with an offset account when linking it to a home loan? Well, you need to know that it normally can only be linked to variable rate loans. What’s more, some offset accounts offered by mortgage brokers or lenders can come with extra fees or interest rates that are higher.
It’s therefore critical that you consider all of your options and potential fees that can come with offset accounts and choose the right option for you.
10. Lowering home loan repayments in the event home loan interest rates drop
It might be very tempting to lower your loan repayments in the event your home loan interest rates drop. But think about this carefully, as it can be a mistake.
So if you’re an expat with a split loan, you might be thinking “what should I do when I reach the second portion of my loan?” or “how to pay off your mortgage faster with a split loan?” if lowering repayments isn’t the answer.
Even if you do have a split home loan, try to maintain or keep up the regular, same repayments as you have throughout the course of your entire home loan. Using this approach means that you will gradually reduce the principal amount and make a dent in the life of the loan by way of reducing the interest you must pay over time.
11. Choosing an interest only home loan
You have a choice when you choose your home loan. You can either select a fixed rate home loan, variable loans or an interest only home loan. Each of these have their unique benefits, but be careful when choosing an interest only home loan, or a loan that has an interest only period. This could be another error.
If you do choose an interest only home loan, be aware that the payments you make can only go towards the interest (as the name “interest only loans implies”). What this means is that you will not be contributing to the principal amount of your home loan balance. You won’t be making any dents on the principal amount with an interest loan and this is the amount that counts.
Interest home loans might not be the best option if your goal is to repay your home loan faster. So if you’re wondering how to pay off your mortgage faster, you should instead, consider a variable rate home loan or perhaps a fixed rate home loan .
For instance, variable rate home loans that offer unlimited additional repayment options tend to be good choices, since they can be more flexible and have lower rates, but shop around and find the right home loan type for your situation.
12. Failing to consult a financial adviser for assistance if required
In the event you cannot consolidate your debt, or you need some financial advice that is specific to your financial situation, a financial advisor might be a good option to help you.
The fact is, there are many different financial options out there in terms of mortgages and knowing how to pay off your mortgage faster and it’s not always easy to make the right choices on your own. For this reason, seeking help when you’re unsure is a good option.
Get a free Australian mortgage assessment today.
Key points to remember for avoiding vital mistakes when paying home loans
There’s a lot of information available when it comes to paying your home loans early, but sometimes it’s important to think about what can go wrong when you’re about to use a strategy to achieve this. The key points to remember for avoiding vital mistakes when paying home loans are these:
- When you have a query, contact an advisor for more information about your finances
- Debt consolidation can assist you if you need to handle and manage various rising interest rates, making it simpler for you to pay off your mortgage early
- Try to use lump sum payments to contribute to your mortgage repayments
- Prioritise the principal amount and try to significantly reduce this in order to pay off your mortgage early
Where is it possible to get more information on this topic? You’ll get it at Odinmortgage.com, in addition to plenty of other facts on mortgage repayments, investment property, advice for Australian expats and more!
Mistakes To Avoid When Paying Off Your Mortgage Early FAQs
Is there a disadvantage to paying off a mortgage in Australia?
In some circumstances, there can be a disadvantage to paying off a mortgage. Say you wanted to make a claim for the interest charged on your mortgage, and have this amount deducted as an interest expense, (which is possible in Australia), this might not be possible. It can mean that your taxable income is not reduced by the interest payments and you could lose out financially.
What are the outcomes if I pay an extra $200 a month on my mortgage?
Choosing to pay an extra $200 a month on your mortgage means more benefits for you. You can end up making significant savings in terms of the interest you have to pay on your home loan. Additionally, you can significantly reduce the loan term by choosing to make additional contributions to your mortgage or home loan.
Do you get penalised if you pay your mortgage off early in Australia?
It is possible. In circumstances where you pay your mortgage off early or make a repayment that is higher than your agreed upon monthly repayment, you can be penalised by the lender. This is because the lender may not receive the interest amount they agreed upon with you and will lose out financially.
Why should you decide not to pay off your mortgage early even if you can?
There are a few reasons why you might not want to pay off your mortgage early even if you can. In some situations, you might be able to make home renovations or reformations with an active home loan. If you don’t have your mortgage, this makes renovations more difficult to achieve.
In other circumstances you may wish to invest in a rental or investment property and make claims for tax benefits, which is easier if you have a home loan or mortgage. And it’s also the case that debt consolidation is greatly facilitated if you have a home loan, which is another reason why you might think twice about paying off your mortgage early, even if you can.
What’s more, you might decide to put your savings to better use and make the decision to invest more money into another asset as opposed to paying off your mortgage early. Or you might choose to make an investment into a superannuation fund as opposed to paying off the mortgage.
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