Borrowing

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

That’s 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 you’ll be ahead $24,000 at the end of the year; pay $1000 a fortnight instead and you’ll have eaten away $26,000 in capital and interest.

And extra repayments

Even putting a spare $50 a month – or just over $10 a week – on the mortgage could shave a couple of years off the life of a $200,000 loan and save you thousands of dollars in interest. It’s worth doing even if the money will be needed later – each day that it’s 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 there’s a rate cut on your variable loan. Yes, you could enjoy the lower repayments – but you’ll eat into your loan if you don’t.

That said, some financial advisers argue that there’s a point where putting excess funds on your mortgage is no longer the best use of your money. Once you’ve 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 you’d normally earn if the money was 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 you’ve 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 you’re in a fixed mortgage you could find the exit penalties prohibitive. It’s cheaper to get out of a variable loan, but it still hurts.

Try talking to your existing lender to see if they’ll match a better deal elsewhere.