Five ways to save money on your home loan
From Michelle Hutchison, Money Expert at finder.com.au
With the new financial year in sight, it’s the perfect time to review your financial commitments, including your mortgage. Can you do better? By doing some research and taking a disciplined approach, chances are, you can. Here’s our top picks for saving on your home loan:
With the cash rate at a historic low and the market saturated with competitive rates, now may be the time to consider refinancing. Reducing your home loan rate by just 0.25 percentage points, could save you $600 a year, or up to $18,000 over the course of a 30-year loan.
Keep in mind though, that you’ll have to pay exit fees to get out of your existing loan, as well as any application fees for establishing your new mortgage.
Before considering your refinancing options, you should consult your existing lender to see whether they can offer you a repayment holiday or a discount.
2. Leverage a 100% offset account
Using an offset account reduces the interest payable on your mortgage by the amount held in the account.
For instance, a 100% offset account with $50,000 on a mortgage of $300,000, would see interest-only calculated on a balance of $250,000. On a home loan of 5.5% interest over 30 years, this could result in a saving of $90,000 in interest. Even better, you’ll minimise your loan term by around seven years.
Ensure that you understand the difference between a partial offset account and a 100% offset account, as the partial offset account only offsets a percentage of the balance in the account, not the entire amount.
It’s also important to realise that the offset account isn’t offered on all full-featured home loans and if it can be accessed, it may incur an account-keeping fee.
3. Make extra repayments
If you commit to making extra repayments on your mortgage, you’ll not only reduce the amount of interest payable on your loan but you’ll also reach home ownership sooner.
For example, if you have a $550,000 home loan at 5.5% interest over a 30 year period and you make extra monthly repayments of $150, and start making your extra repayments at 5 years, you can save a total of $45,548.80 in interest. You’ll also pay off your mortgage two years and four months earlier!
When you make extra repayments, check to see whether your lender allows you to make additional repayments without penalty, as some lenders will charge a fee for additional repayments, or will place a cap on the amount of extra repayments you can make.
4. Repayment frequency: Go fortnightly
Changing your repayment frequency from monthly to fortnightly will see you pocket thousands of dollars in interest and reduce your loan term.
For example, if you have a mortgage of $550,000 at 5.5% interest over a 30 year period your monthly repayments are $ 3,122.84. If you switch your monthly repayments to fortnightly, your fortnightly repayments would be $1,561.42 and you would save $114,134.75 in interest and cut your loan term by 5 years and 1 month.
These savings come down to the way the mortgage interest is calculated.
Generally, lenders calculate the fortnightly repayment rate by halving the monthly repayment rate, which means you still pay the same amount each month but it’s split in half. With 26 fortnights in a year, this means you’ll end up making one extra monthly payment every year, paying off your loan much sooner.
5. Steer clear of ongoing fees
Australian banks and lenders are competing in a highly saturated market and this means they can offer competitive rates and features. Typically, lenders will charge ongoing account-keeping fees to maintain your home loan account, or annual fees for packaged home loans.
Keep your eyes peeled for lenders that waive these ongoing fees (that is, monthly administration fees, exit fees and annual fees), as this means you won’t have to worry about recurring expenses associated with your mortgage. Over the life of your loan, the absence of ongoing fees could save you thousands. Now, who doesn’t want that?
Michelle is the Money Expert for finder.com.au, one of the
biggest online comparison networks in Australia.