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Should I pay off my mortgage early?

Mark Bristow avatar
Mark Bristow
- 4 min read
Should I pay off my mortgage early?

Being in debt can be worrisome, especially if the debt is large and can take years to repay, like with a mortgage. While principal and interest repayments can gradually pay off your property over time, you may also be able to get ahead on these repayments, exit your loan early, and save on interest charges. 

What are the benefits of paying off a mortgage early?

Own your home outright sooner 

Enjoy the satisfaction of being the owner of your property, without worrying about the bank having an interest in it. Plus, no more mortgage repayments can mean more room in your household budget.

Build your equity faster

The more of your mortgage principal you pay off, the more equity you can build in your property, beyond capital growth alone. This may offer you more options for making your equity work for you, such as accessing a line of credit

Save on interest charges

Because interest is charged on your remaining home loan principal, the faster you can pay off your mortgage, the less interest you may be charged on each repayment. Additionally, paying off your property faster means making fewer mortgage repayments in total, which may mean paying less total interest on your home loan over the long term. 

What are my options if I want to repay my home loan early?

Choose a shorter loan term

One of the simplest ways to pay off your home loan early is to select a shorter loan term when you first apply for the loan or you refinance, such as 20 or 25 years rather than 30. 

While this means your minimum repayments will cost more each month, your property will be fully paid off sooner. 

Extra repayments

Paying more than the minimum required amount onto your home loan each month, or adding a lump sum onto your mortgage when you can afford it (such as when you get a tax refund) is another way to pay off your property faster. 

Check if your lender offers this option, or if there are terms and conditions involved – for example, some fixed rate home loans may limit how many extra repayments you can make per year. Also, you may not be able to easily access this money again if you need it, unless your mortgage also includes a redraw facility

Offset account

An offset account is a bank account linked to your home loan. Money deposited in this account is used to “offset” your mortgage principal when calculating the interest charges on your home loan. 

For example, if you had a $400,000 home loan, and $50,000 in your offset account, you’d be charged interest as if you only owed $350,000 on your home loan. 

A home loan with an offset account can deliver many similar benefits as making extra repayments, while still offering easier access to your money. Keep in mind that mortgages with offset accounts may charge higher interest rates and fees than more basic “no-frills” home loans. 

When should I consider switching lenders and refinancing my mortgage?

Refinancing your home loan is another option that could help you to pay off your mortgage faster, in a couple of different ways. 

By switching from your current home loan to another, you may be able to also switch to a shorter loan term. While this could mean higher monthly repayments, you may pay less in interest charges overall. 

Refinancing could also allow you to switch to a home loan with a lower interest rate. This could help to lower your minimum monthly repayments, giving you some extra breathing room in your household budget. Of course, you could also choose to keep making the same repayments as you were on your original loan, so the extra money goes towards paying off your mortgage faster. 

The best time to refinance your mortgage will vary depending on your financial situation. Some low rate home loans for refinancers have relatively low LVR requirements, so you may want to check that you’ll have enough equity available in your property to be eligible for one of these loans. You may also want to confirm that you’ll fulfil the loan’s other eligibility criteria, in areas such as your income and expenses. 

If you’re not certain whether refinancing will be the best option to help you pay off your home loan sooner, you could consider getting in touch with a mortgage broker for more specific advice. 

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Product database updated 29 Mar, 2024

This article was reviewed by Personal Finance Editor Alex Ritchie before it was published as part of RateCity's Fact Check process.