How to pay off your mortgage faster

Is there a way to pay off your home loan more quickly, without increasing your repayments? Well, maybe.

There are two key ways that people can reduce their home loan interest, and potentially pay off their loans more quickly. But there are some things to watch out for, too.

Mortgage advisers say it is common for people to use a revolving credit account to help pay off their loans more quickly. If you've encountered a 'finfluencer' online offering to teach you how to get rid of your home loan more quickly, this is often the strategy they suggest.

It usually works like this: You section off a bit of your home loan so it acts a bit like a large overdraft. All your income goes into the revolving credit account in the month, reducing the interest that is accruing. You pay your bills and daily living costs with your credit card so that you leave the money sitting there. At the end of the month, you pay off your credit card and hope that you have a bit of income left over to reduce the balance of the account as you begin the process again for the next month.

Ed McKnight, economist at Opes Partners, said this strategy only worked if people had money in their revolving credit account. "At today's interest rates you need to keep your revolving credit 20 percent full before you start breaking even. If you have a $50,000 revolving credit you need just under $10,000 in that before you start saving interest.

That's because revolving credits are on a floating rate as opposed to a fixed rate.

"If you have some holiday savings, or if you have some money stashed away that you can put in your revolving credit or offset account, then it can help you save on interest and then help you pay off your mortgage faster. But, simply having a revolving credit that's always empty or is only 5 percent full is not going to save money. It's probably going to cost you money."

He said he sometimes saw people have success with a small revolving credit limit of $10,000 or so.

"They spend the year paying off that revolving credit, and then, at the end of the year, they take all of that money, pay it off on their main mortgage, and then start again the next year. The revolving credit limit is then a savings goal that they can work towards, while saving a bit of mortgage interest in the process."

Mortgage adviser Cam Hastie said he usually dealt with people with limits of between $50,000 and $100,000. "Some people do require and get benefit from a really big revolving credit facility but for the most part limits tend to be smaller."

A spokesperson for ANZ, the country's biggest bank, said about half of its customers with flexi home loan accounts had no balance owing.

"For those that do have a balance owing, customers have, on average, drawn less than half of their available limit.

"More broadly, home loan customers remain in a strong position. Around 47 percent of all home loan customers are at least six months ahead on repayments and almost half of them having a savings buffer of $5000 or more."

Some banks offered offset options, where people gave up interest on their savings in return for lower interest rates on their borrowing.

McKnight said he had dealt with a woman who used an offset account to help her child.

"A mum who had just come into some money wanted to keep that money in the bank. She was able to use an offset so that the money she had in the bank would save her daughter interest on her mortgage. So while Mum didn't earn a return on her money, the daughter could save a lot of money on her mortgage. And that let her pay it off much, much faster. Because then her whole payment was going to paying off debt. That situation wouldn't apply to everyone, but it shows you that there are some quite interesting situations that are out there."

David Cunningham, chief executive at Squirrel said it could have taxation benefits for some borrowers, too. But he said the benefits of revolving credit and offset accounts tended to be small compared to the progress that could made with additional lump sum payments.

McKnight said he had seen people pay off their loans quickly when they gradually increased their repayments as their income rose.

"If you take out a $500,000 mortgage and every year you increase your repayment by 3.5 percent which is roughly what incomes have grown at, then rather than paying off your mortgage in 30 years, you'll pay it off in just over 18 years, and save about $168,000 in mortgage interest."

Hastie said there was "no rocket science".

"It's pay more, pay more often and that's how you pay your mortgage off fast. The key to doing that is understanding how much extra you've got, which is a budgeting question not a mortgage product question."

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