Buying a Home Smart Guide

6. Paying off your mortgage

What youll learn in this step: Early repayments and extra repayments will wipe thousands off your interest bill and years off your loan.

Ask a financial planner for advice on building wealth and, almost without fail, theyll tell you that the best thing you can do is pay off or at least substantially reduce your mortgage.

Thats because the interest on your home loan (as opposed to that on an investment property mortgage) is not tax deductible, and because you need to free up cash flow to make other investments to build wealth.

Early repayments

One of the most common ways to pay off your mortgage early is to make more frequent payments. Pay $2000 a month on your mortgage and youll be ahead $24,000 at the end of the year; pay $1000 a fortnight instead and youll have eaten away $26,000 in capital and interest.

Extra repayments

Even putting a spare $50 a month or just over $10 extra a week on the mortgage could shave a couple of years off the life of a $200,000 loan and save thousands of dollars in interest. Its worth doing even if the money will be needed later each day that its on your mortgage is another day your interest bill is lower.

Extra payments can take the form of higher scheduled repayments or redraw amounts you transfer to your home loan account from time to time.

A good discipline is to leave your scheduled repayments as they are even when theres a rate cut on your variable loan. Yes, you could enjoy the lower repayments but youll eat into your loan if you dont.

That said, some financial advisers argue that theres a point where putting excess funds on your mortgage is no longer the best use of your money. Once youve got your loan down, it may pay to redirect funds towards other investments.

Offset accounts

Offset accounts have a similar impact to extra repayments. With an offset account, the rate of interest youd normally earn if the money were deposited in a conventional account is set off against your mortgage.

Say you have a home loan of $100,000, at an interest rate of 7 per cent. You also have an offset account holding $20,000. Instead of receiving interest on the $20,000 deposit, the equivalent interest is deducted from your mortgage.

Refinancing

In the end, if you think youve got a dud deal you could consider refinancing switching out of your current loan into a new arrangement with a better rate or features.

However, look at the costs carefully. If youre in a fixed mortgage you could find the exit penalties prohibitive. Its cheaper to get out of a variable loan, but it still hurts.

Try talking to your existing lender to see if theyll match a better deal elsewhere.

Read more about:

The perils of falling house prices, Barbara Drury, September 13 2006 - The Sydney Morning Herald: If you can't keep up with your monthly mortgage repayments, call a consumer credit centre.