Buying a home is likely the most expensive thing you'll ever buy. Paying off your mortgage will probably be even more expensive.
The ASX banking giants of Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB) make billions of dollars a year from the mortgages. They are the winners from mortgages.
If you borrow hundreds of thousands of dollars you might end up paying double the initial borrowings after all the interest and repayments are factored in.
Rent might be described as dead money, but paying interest isn't good either. A property isn't truly yours until the entire debt is paid off. That's why I believe one of the best financial things you can do is pay off your mortgage quicker. Here are three strategies to do so:
Use an offset account
When I eventually buy a home I plan to use an offset account as much as I can, and you should too.
The money you save is a tax-free, guaranteed return at a higher interest rate than you could earn from a savings account or term deposit (which would be taxable).
The savings you make from the offset account can be used to pay down your loan faster, which helps turn compound interest in your favour.
Get a cheaper interest rate
Unless you have the cheapest interest rate you can get you are missing out on potential savings. If you're a good borrower then a bank will fight to keep you, if you ring to negotiate then you may get a better deal. Or you should consider a new bank if they won't budge.
For every $100,000 you have borrowed, 1% of interest costs $1,000 a year. And this compounds negatively over time if you are paying too much in interest.
Getting a better interest rate can save you thousands over the life of a loan.
Make additional loan payments
A very obvious way to pay down your mortgage quicker is to make more payments. If you pay off money at the start of the loan then you will save many thousands over the course of that loan.
Unless you utilise a budget, one of the ways to trick yourself into paying more is to split your monthly payment in half and pay that every fortnight. The monthly payment will still be fairly similar but you will be better off over the course of the year, and particularly the life of the loan.
Foolish takeaway
The quicker you can become debt free the quicker you can build your net worth to the figure you want. Once you've paid off your mortgage you can send a lot more money into growing your assets.
