How to pay off your home loan in 5 years

Pay off your home loan faster

Taking out a home loan can be daunting. Especially when you consider the thought of a 20 year or 30 year commitment – but it doesn’t have to be.

Paying off a home loan in 5 years is the dream, right?

The reality is, it’s a very challenging goal.

Having such short or tight time constraints could be very strenuous, but it is possible given the right circumstances. * 

Here are our top 10 tips on how to pay off your home loan in 5 years:

• Borrow a realistic amount to fit your goal - Your choice on properties might be limited as the amount you can borrow will be less if you wish to reach that 5-year goal. With the median sale price for a house in Newcastle landing at approximately $1.2 million, you need to consider where you buy and how much your property will set you back.
• Save a decent deposit  - Having a sizeable deposit will lessen the amount you will need to borrow and reduce the amount of stress from worrying about paying off a large loan. Remember, just because you have a larger deposit doesn’t mean you should borrow more. 
• Increase the frequency of your repayments - Make sure to set your repayments to automatically come out at an amount that fits your monthly budget. Set a timeline to pay down your loan by increasing the frequency of payments. You could switch from a monthly schedule to a fortnightly plan. More frequent payments reduce your principal balance on which interest is calculated. Therefore, the lower your balance, the less interest you’ll pay. 
• Make extra payments - Your tax refund, bonuses, financial gifts, or inheritance are all additional funds you can use to pay your loan off faster. As with more frequent payments, additional payments will lower your outstanding balance on your home loan. The lower balance means you’ll pay less interest, and it could shorten the lifespan of your loan.
• Increase your repayment amount - Try to increase the minimum amount you repay each month. For example, if your minimum monthly repayment amount is $1,800, you can round it up to $2,000. The additional $200 could help you repay your loan sooner and save you a lot on interest. Check out our handy repayment calculators to see how an increase in repayments could benefit you.
• Review interest rates - Interest rates are important to how soon you’ll pay off your home loan. That’s why keeping up to date with your interest rate and what the market is offering is important. Don’t hesitate to contact your bank to negotiate a better rate if you see a better offer elsewhere.
• Refinance your existing loan - Refinancing may take effort. Still, it could significantly impact how much you save over the life of your loan. Better interest rates aren’t the only thing you should consider when refinancing, though. Have a look at the features of home loans, too. Is there a limit to how many additional repayments you can make? Are there penalties if you pay off your home loan sooner? Can you link multiple offset accounts to your home loan? Consider the product’s features to see if it best fits your goal.
• Open an Offset Account - An offset account can help you save on the interest you pay on your loan every month. Some home loan products will even allow you to link multiple offset accounts to your home loan. An offset account is a savings account or a transaction account that you link to your home loan. The balance in this account will offset against your home loan balance before the bank charges interest. Let’s say you owe $200,000 on your home loan, and you have a linked offset account with a balance of $20,000. Your bank will then only charge you interest on $180,000 instead of $200,000, allowing you to pay less interest each month, which could save you thousands over the life of your loan.
• Switch from an Interest Only Loan to a Principal & Interest Loan - With a Principal & Interest Loan; your repayments cover both the interest and the principal amount you borrowed. It may cost you more in repayments, but it also means you’re paying off your debt and owning more of your home with every payment. Over time, you build equity until you eventually pay off your home in full. Not only could this type of loan save you money in interest, but it could also allow you to own your home sooner.
• Purchase an investment property - You might consider renting out your new property, so you can ultimately flip it for a better return (dependent on how the housing market performs). Once your property is paid down you have the option of moving in once your tenancy agreement lapses, or selling the property and using the profits to buy your next place.

Why should I try and pay my loan off faster?

Paying your loan off faster means your loan could cost you less in the long run, as you’ll have to pay off less interest.

What are some other tips to pay off your home loan quickly?

• Increase your repayments every chance you get - If you can repay a little more one month, jump at the opportunity, it will save you on interest in the long run. So, next time you come into a bit of cash, whether it’s a gift from grandma or that momentous tax rebate, put it towards repayments on your home loan to make your money worth more.
• Take advantage of an offset account - This means the money in your offset account is accessible if required, but it will also support you in minimising the interest on your loan.
• Check for benefits - If you are a first home buyer be aware of any support your state offers. For example, the NSW Government offers a comprehensive package to improve housing affordability, which includes potential stamp duty relief.

Repaying your mortgage in 5 years is ambitious, so it is important to be realistic with your finances. If you want to take a vacation, have a big Christmas or you just haven’t considered unexpected costs like car repairs, you could be caught out. If the life of your home loan surpasses the 5 year period, to 8 or even 10 years, on average this still isn’t considered a long time to be repaying a home loan. When you take out a home loan, it’s good to try and pay off as much as you can as quickly as you can because this will save you on interest, however it’s also important to not box yourself into a rigid time frame or financial distress. When you do take out your home loan, be smart with your money and consider how much you can really afford to borrow if you want to pay off your loan in a shorter time. Following a budget and staying on top of your repayments will ease stress and give you a greater chance of paying your mortgage off quickly.

* General advice on this website has been prepared without taking into account your objectives, financial situation or needs. Before acting on the advice, consider its appropriateness. Consider the relevant disclosure documents, which include Greater Bank's Terms and Conditions for Deposit and Credit Accounts for some products, Product Disclosure Statements (PDS) for others and Greater Bank's Financial Services Guide (FSG).