As a property investor, you’re in the business of keeping your expenses down and boosting your rental income - and one of the largest (often unavoidable) expenses you’ll face is your home loan.
That’s probably why one of the most common queries surrounding home loans is, “how to pay off your home loan in five years”. The sooner you pay down your loan, the less you’ll pay in interest and the quicker you’ll build equity in your investment property.
Clearly, there are a lot of advantages to learning the quickest way to pay off your home loan. So, we’ve rounded up a bunch of practical strategies to help you pay off your home loan as fast as possible.
What are the benefits of paying down your home loan sooner?
The biggest advantage to paying off your loan faster is this: you stand to save a lot of money.
The default repayment amount and the frequency of your home loan are set by your lender. The longer it takes you to pay back your loan, the more you’ll need to pay in interest. So, a long loan term of 20 to 30 years benefits the lender, not you as the borrower.
Instead, it’s worth looking into how to pay off your home loan in 5 years because:
- You’ll lower the amount of interest you pay: the shorter your loan term, the less you’ll be charged in interest and the quicker you’ll pay back the original loan amount.
- You’ll reduce your total loan amount: with less interest to pay, your total debt will end up being thousands of dollars cheaper if you discover how to pay off your home loan in 5 years.
- You’ll build equity faster: plus, the lower your home loan, the higher the amount of equity you hold in your investment property. This is especially valuable if you’re planning to build an investment property portfolio, as you can use this equity to secure a new loan sooner.
To really understand the benefits of paying down your home loan sooner, it can be helpful to use a mortgage calculator to compare different scenarios. Let’s run the numbers.
We know that the average investor home loan in Australia is currently $561,531. At the average interest rate of 2.62% with a 25 year long term, you’ll likely be paying $2,563 per month in repayments.
But if you decided to boost your repayments to $10,000 per month, you’d be able to pay off this debt in just over five years. Plus, you’d save a whopping $168,609 in interest, too.
Six smart strategies for how to pay off your home loan quicker
Ready to discover the quickest way to pay off your home loan in 5 years? Here are six tangible steps you can take to reduce the amount of interest you pay, reduce your loan term and pay off your mortgage early.
1. Borrow less than you can afford
Even before you secure your first (or next) investment property, there are practical steps you can take to reduce your loan and pay down your future mortgage faster.
It all starts by finding an affordable investment property in a high-growth suburb. While banks may approve you for a larger loan amount, borrowing less than you can actually afford is a smart way to pay off your home loan sooner.
Securing a smaller mortgage means you’ll be able to comfortably afford your repayments, and you may even be able to make extra repayments to cut down your outstanding debt faster.
Plus, you could even be able to make lump sum payments to reduce your loan term and the amount of interest you’ll be charged.
2. Save a large deposit
In a similar vein, having a big deposit saved up can help lower your expenses and speed up the time it takes to pay off your home loan.
Essentially, a larger deposit means you’re borrowing less money from the bank. A lower loan amount means less interest paid and the opportunity to repay your original loan amount faster, too.
Let’s run you through a quick example to showcase the benefits of saving a large deposit:
For a $700,000 property, a 20% deposit ($140,000) means your loan amount would be $560,000. But if you saved up a 30% deposit ($210,000), your loan amount would only be $490,000.
Over a 30 year loan term with an interest rate of 2%, here’s how your repayments would play out:
- Monthly repayments with a 20% deposit: $2,069
- Monthly repayments with a 30% deposit: $1,811
Essentially, you’re saving $3,096 per year just by having more cash saved up.
And if you were also able to increase your repayment amounts and frequency (more on that next), you’d be able to cut down your loan term and pay off your home loan in 5 years with ease. Tracking your savings rate can start with something as simple as setting up a table in Google Sheets to take a deeper dive into your finances.
3. Increase your repayment frequency
As a default, many lenders will ask you to make monthly repayments to pay off your home loan. But if you’re looking to pay off your home loan in 5 years, one of the best steps you can take is to increase your repayment frequency.
By boosting your frequency to fortnightly or even weekly repayments, you’ll cut down your loan at a much faster rate.
Even if you can’t afford to double your monthly repayments, there are ways to break down your regular monthly repayments into manageable amounts.
Take this example for how to pay off your home loan early:
- Let’s say your monthly repayments are $2,500.
- To boost your repayment frequency, you decide to pay half of your monthly repayments ($1,250) each fortnight.
- Over 12 months, you’ll have made 26 repayments. This works out to 13 regular monthly repayments, rather than the 12 monthly repayments set by your lender.
- By making one extra payment each year, you’ll pay off your loan faster without taking a huge hit to your cash flow either.
4. Make higher repayments
Increasing the amount you repay each month is another practical way to pay off your home loan in 5 years. This is a great option if you’ve got surplus cash flow from your investment property income and want to put it to good use.
You can set your repayment amount as if you’re being charged a higher interest rate and use this extra money to pay down your mortgage faster.
Let’s run the numbers to help you understand what you’ll save just by making higher monthly repayments:
In this example, increasing your monthly repayment amount would allow you to pay down your loan in just over 5 years and save a whopping $176,928 over the life of your loan.
5. Use an offset account
An offset account is a savings account linked to your home loan and can be a powerful way to lower the amount of interest you pay on your home loan.
It can be a great option if you've got extra cash to spare but don’t want to lock away all your spare money to pay off your home loan early.
Here’s how it works:
- Let’s say you have a home loan balance of $500,000.
- You put $50,000 into an offset account linked to your home loan.
- The bank will now only charge interest on the difference between your loan amount and offset account balance ($500,000 - $50,000 = $450,000).
The higher your offset account balance, the more you’ll save in interest and the quicker you’ll pay off your home loan. This is a practical solution to the dilemma of how to pay off your home loan in 5 years.
6. Avoid an interest-only loan
Last but certainly not least is our final tip for how to pay off your home loan in 5 years: avoid an interest-only loan.
As the name suggests, this type of loan means you’re only paying the interest on your total loan amount. While this type of loan can lower your monthly repayments, it also means your original loan amount isn’t decreasing.
Plus, once your interest-only loan period finishes (usually after five years), you’ll then be switched to a principal and interest loan (often at a higher interest rate, too).
While interest-only loans can seem helpful in the short term, you’ll end up paying more interest over the long term (which isn’t ideal if you’re looking for how to pay off your home loan in 5 years).
And that’s a wrap. The quickest way to pay off your home loan involves a combination of tactics - from borrowing less than you can afford to boosting your repayment frequency and using an offset account to lower the interest you need to pay.
Ultimately, paying down your loan faster is a smart approach as an investor to lower your expenses, reduce your total debt and build equity (and your property portfolio) faster.
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