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Should you be making mortagage overpayments?

Mortgages receive a pretty bad rap as a burden upon homeowners. Earlier this year, it was revealed that pre-retirees aged 55-64 were 18 percent more likely to continue working past retirement age for every $100,000 of their mortgage debt, according to research published in the Conversation and carried out by Rachel Ong of Curtin University and her associates.

So, is there any way to make sure that your mortgage is paid off well before you’re leaving the workforce? Of course! Let’s have a look.


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How can Australians repay their mortgages quickly?

Overpayments

Most Australians are making an effort to pay a little extra each month to speed up their repayment. In the June 2017 financial literacy report from ASIC, 53 percent of Australians reported paying some extra money in addition to the minimum amount due each month.

If you can afford to put down a bit of extra cash with each repayment, you can settle your debt sooner and ultimately save on interest costs. To demonstrate, say you’ve borrowed $500,000 at a fixed interest rate of 3.99 percent. To pay this off within the maximum 30 year period, you would need to pay the lender $2,394 each month and by the end, you’d have paid $861,910, according to MoneySmart’s mortgage repayment calculator.

Using MoneySmart’s extra repayment calculator, we can see that the same loan would be paid off in 27 years and 10 months by increasing monthly payments by only $100. This would save you a total of $30,578. If you’re able to pay even more – like an extra $1,000 monthly, this goes down to 17 years with a saving of $170,876!

woman walking on the road feeling the freedom she has

Paying off your mortgage early can mean you taste sweet freedom sooner rather than later.

Increased frequency

There are 26 fortnights and 12 months in each year. So, by paying half of a monthly repayment each fortnight, you’ll pay more frequently and end up putting down an extra month’s payment annually. The difference to your account may hardly be noticeable, but you could cut more than four years off the term of your loan.

Using the above hypothetical loan, paying $1,197 fortnightly could see you mortgage-free after 25 years and 11 months and saving $56,769.

Lump sums

While this is much harder to estimate, directing surprise bonuses, happy tax returns or inheritance towards repaying your mortgage can help to reduce your principle, and thusly save on interest in the long term.

Is it worth making mortgage overpayments?

Seeing the light at the end of the mortgage tunnel sooner rather than later definitely sounds like a good thing – but there are reasons forking out extra cash on a regular basis might not be the best option for you.

Benefits

  • Earlier freedom from debt commitments.
  • Savings on interest payable.
  • Total homeownership can happen sooner.
  • Flexibility to underpay down the line, if needed.


Downsides

  • A tighter budget, meaning less money available for spending on leisure.
  • May simply be unaffordable.
  • Some lenders may charge early termination fees to cover interest lost.
  • It could be more worthwhile to save that extra money.
Make sure to do research on the terms of your loan before you decide to accelerate your payments.
woman with hat sitting on a dockside

A tighter budget now could mean greater freedom in the future – is mortgage overpayment right for you?

How can I save money on my mortgage responsibly?

Make sure that if you’re funnelling extra money into your mortgage repayments, it’s not affecting your quality of life.

Offset accounts

A savings account linked to your mortgage allows you to save money for future investments or holidays while still helping to reduce the amount you pay in interest. Simply put, with the $500,000 loan mentioned earlier and $25,000 in an offset savings account, you’ll only pay interest on $475,000. According to AMP’s loan offset calculator, this would save $52,452 in interest and reduce the term by a year and nine months.

These savings on interest and time would only increase with regular contributions to your offset account.


Seek financial planning advice

Make sure that if you’re funnelling extra money into your mortgage repayments, it’s not affecting your quality of life. A professional financial planner will help you figure out the best way to speed up your mortgage without costing you any enjoyment. Here at Invest Blue, we want to help you overcome your debts and achieve total financial freedom – contact us to discuss financial strategies today.

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What you need to know

This information is provided by Invest Blue Pty Ltd (ABN 91 100 874 744). The information contained in this article is of general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice with regards to those matters and seek personal financial, tax and/or legal advice prior to acting on this information. Read our Financial Services Guide for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relations to products and services provided to you.