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What is the fastest way to pay off a mortgage?

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When looking at the fastest way to pay off a mortgage there are many issues to take into consideration. While there is a natural push to payback mortgage debt as quickly as possible, this needs to be done within your specific financial constraints. You also need to leave a degree of “headroom” in the event that you experience unexpected financial difficulties further down the line.

Here at Crester Credit we provide a range of loans to help you reorganise your finances and look to the future with renewed confidence.

7 ways to reduce the duration of your mortgage

We will now look at 7 ways in which you can reduce the duration of your mortgage, saving interest while also bringing a valuable asset into the fold. When looking at the fastest way to pay off a mortgage, we will consider the following scenario:-

Mortgage: $600,000
Mortgage term: 30 years
Interest rate: 5%
Interest: Calculated daily/added monthly
Payments: Principal and interest

 

Reduce the duration of your mortgage

It is important to find a balance between what you can afford and ensuring that you leave some “headroom” to accommodate any unforeseen circumstances. However, the most basic way to pay off your mortgage quicker is to reduce the duration.

Using the above scenario:-

Duration of mortgage

While the monthly repayment will increase with a shorter duration, on the above mortgage, you would save in excess of $200,000 in interest between a 30 year mortgage and a 20 year mortgage.

 

Increased monthly repayment

The vast majority of mortgage companies will allow you to make regular monthly overpayments which can have a huge impact on the loan duration, total interest and the total cost of your loan. The sooner you begin to make these overpayments the greater the interest savings going forward.

Increased monthly repayment

As you can see from the table above, not only are there interest payments savings over the duration of your mortgage but regular monthly overpayments also reduce the duration. While the above figures assume that regular monthly overpayments are made from month one, even sporadic monthly overpayments will reduce the overall cost of your mortgage.

 

Lump sum overpayment

On occasion, you may be in a situation to make a one-off lump sum overpayment at the outset of your mortgage. It may be that you have come into more money after signing the mortgage arrangement and you would prefer to reduce the mortgage capital, thereby reducing the amount of interest paid in the future.

In the following example, we will assume that the overpayment is in addition to the first monthly repayment.

Lump sum overpayment

You receive the maximum benefit from a lump sum payment the earlier it is used to pay off part of your mortgage capital. This is because you will pay less interest, and more of your monthly payments will go towards the repayment of capital.

 

Increased monthly payment and lump sum overpayment

While the stand-alone benefits of an increased monthly payment and a one-off lump sum overpayment are well demonstrated above, when you combine the two together this can have a huge impact. Even the monthly overpayments in the table below equate to $3600 and $6000 per year – no small amount!

Increased monthly payment and lump sum overpayment

Introducing a $20,000 one-off overpayment and making an additional payment of $500 a month equates to interest savings over the duration of the mortgage in excess of $200,000. This is a huge interest saving by any measure and, where financially sensible, demonstrates the benefits of using additional capital to pay off your mortgage.

 

Offset mortgage against constant savings account balance

There is no doubt that demand for offset mortgage deals has increased dramatically in recent years. When you consider that interest rates have been subdued for some time this is perhaps the perfect opportunity to consider an offset mortgage. In effect, the arrangement offset any funds in your savings account against your outstanding mortgage balance. If for example you had a mortgage of $600,000, with $25,000 in your savings account, these would be offset, meaning that you only pay interest on a balance of $575,000.

In the following example we will assume that savings remain in the account for the duration of the mortgage, earning 1% per annum.

Offset mortgage against constant savings account balance

By retaining the balance in your savings account you are saving tens of thousands of dollars in interest and reducing the duration of your mortgage. Obviously, the mortgage interest savings would be less if you were to spend any of your savings. There is also the potential for reducing the duration even further if you decided to use your savings to offset your mortgage when the balances were equal.

 

Offset mortgage against regular savings

If you have a significant amount of savings, the potential interest savings via an offset mortgage can be impressive as shown above. However, the potential savings are even greater if you are able to make sizeable regular monthly contributions to your savings account. There is the double whammy of an ever-increasing savings account balance, creating a growing amount to offset against your mortgage balance.

Offset mortgage against regular savings

There is also the opportunity to reduce the duration even further by using your savings to repay the mortgage when the balances are equal. While this would mean that you had no savings at the end of your mortgage, you would have a fully paid-up property.

 

Business cash flow mortgage offset

There is the potential to get a little more innovative when it comes to offset mortgages. For example, if you own a company there may be the opportunity to use company cash flow to offset against your mortgage balance. This is obviously just hypothetical as your business must have healthy cash flow in order to fund this type of arrangement. There may also be various tax/legal issues to take into consideration.

However, let us assume that for 25 days of each month your company has a positive cash balance. At the end of this period invoices/employees are paid and then income is received, reverting to a positive cash balance. In the examples below we will use $30,000 and $60,000 cash flow availability. We need to calculate the average offset balance over the full month. The calculation is as follows:-

Average month: 365/12 = 30.4 days
Average balance: 25/30.4 x Available funds

Example 1: (25/30.4) x $30,000 = $24,671
Example 2: (25/30.4) x $60,000 = $49,342

Business cash flow mortgage offset

The hypothetical opportunity to use business cash flow to offset against a personal mortgage has the ability to save significant interest as shown above. This concept could also be extended to business mortgages where the funds would still be retained within the company – this may be less complicated!

 

Current interest rate environment

Savings interest rates across the globe have been minimal for some time. This is perhaps the perfect environment in which to consider an offset mortgage or make additional mortgage repayments. You will be earning negligible interest on savings with the potential to reduce your mortgage interest payments. Offset mortgages offer the ability to be a little more creative with how you best utilise available cash balances.

 

Summary

Whether increasing your monthly repayments, introducing one-off lump sum repayments or offsetting savings account/cash flow balances against your outstanding mortgage, there is the potential to reduce interest and shorten the duration of your mortgage. Obviously, all of these potential options need to be considered in light of your current and future financial situation. While offset mortgages are slightly different, once you have made a payment to a traditional mortgage you cannot get it back!

The concept of using business cash flow is an interesting idea but you would need to take advice regarding company/personal taxes and company regulations.

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