Reducing Your Mortgage Term

Whether your are simply trying to pay off a single home loan, or whether you are a real estate investor with multiple mortgages, there are four essential methods that mortgagees can apply to cut years off of their standard mortgage term.

Two of these methods don’t involve the need to make any payments over and above your standard repayment, and yet these can almost halve a standard loan term. The third method only requires you make a slightly higher repayment than normal. All four of these methods are covered in extensive detail in my mortgage minimization techniques article available at the financiallyfree.com.au website. You might like to read that article first for a better overall understanding of what I discuss below.

In the first section of this article, I cover three traps which borrowers need to watch out for that could unknowingly increase their mortgage term. In the second section, I cover some hard and fast general rules for borrowers when it comes to mortgage reduction.

Section 1 – Traps to look out for which might impede your mortgage minimization plan.

Mortgage Trap No.1:
Fixed rate mortgages often allow for less flexibility than variable rate mortgages. If you have 100% of your mortgage on a fixed rate, this can limit your ability to offset the loan balance and/or pay extra into your mortgage should you choose to. If seeking the security and certainty of a fixed rate mortgage, then it's best to setup up a split facility where you have, say, 60% of your loan fixed, and 40% on variable rates, as most variable rate loans allow you to pay extra into the loan without incurring any penalties.

Fixed rate mortgages can also prove an expensive trap if you decide to restructure, refinance, or sell your property before the end of the fixed term. This is particularly pertinent if you plan to be the next Hans Jakobi of real estate investment, as you will need to leverage off the equity that you've built up in your existing properties in order make further purchases. Most fixed term mortgages incorporate very significant break-costs if you wish to restructure or refinance before the end of the fixed term.


Mortgage Trap No.2:
Some loans, including variable rate ones, can include high fees and charges. With mortgage reduction you need flexibility with your loan. The flexibility to pay extra into your loan if/when you have extra to pay into it. The flexibility to redraw amounts, should you need to, that you have paid in over and above your standard repayments. Do your homework first when selecting a lender and loan product to ensure you won't be stuck with high fees and charges for every time you avail yourself of these flexible loan options.


Mortgage Trap No.3:
If using a Home Equity Loan, or a Line of Credit, the biggest trap can be yourself! Discipline is needed to ensure that you don't stick your hand in the cookie jar and dip into your available equity to buy a new car, go on a holiday, or buy household appliances. It's best to set a mortgage reduction plan at the outset, and set budget targets as to what you want the loan balance to be at any given month over the remaining term of the loan until the mortgage is paid out. It is quite easy to do this up to 30yrs ahead using some personal finance software (or even using an Excel spreadsheet if you have the skill to set up the amortization formula yourself).

Once you have set these targets and have printed them out, you can cross them off each month. This will keep you on track with your debt reduction plan, and will certainly help to curtail any temptation to use your available equity for discretionary purposes. Why? Because you will immediately see the impact it will have on the term of your loan, and on the total additional interest you will have to pay on the loan over time as a result.

Section 2 – General rules when it comes to creating a mortgage reduction plan.

Mortgage Reduction Rule 1:
Use all your income and savings to reduce the mortgage balance upon which the interest is calculated. This doesn't necessarily mean "putting all your income and savings into your home loan". It can simply mean consolidating all your cash savings, and monthly income, into the one account that will offset the mortgage balance. This account could be a 100% Offset account, or a home equity loan or line of credit, or it could be a standard home loan with a redraw facility.

Have your salary paid into this account so that it is offsetting the interest charged on your mortgage for as many days as possible until you need to draw upon and use it.

Shop around as you'll need to watch out for fees and charges that you might incur with some lenders when you're making regular or multiple monthly redraws from the account.


Mortgage Reduction Rule 2:
If you're not off-setting your mortgage balance with your income or savings, then try to structure your loan so that you are making either weekly or fortnightly repayments as opposed to monthly. This will reduce your loan balance a little earlier and more frequently than making monthly repayments, hence minimizing the compound interest which is charged daily on your loan balance.


Mortgage Reduction Rule 3:
Pay any extra amount in that you can if or when you can. This could include an annual tax refund cheque, or possibly a Christmas bonus from your employer. Paying a little more in today can pay big dividends in terms of shortening the term of your loan and reducing the total interest that you will pay over the life of your loan. I provide some calculated examples of how this works in my mortgage elimination article.


About the author: Damien Dupont has made it easy for you to cut years off your mortgage and put thousands of dollars back into your pocket. He also provides priceless advice for those seeking to build wealth with real estate. Learn the 4 essential keys to rapidly reducing your mortgage at his Financially Free website.

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