January 17, 2024 by Mortgage Choice Neutral Bay
For most of us, paying interest is unavoidable. But the staggering amount of interest you pay on a home loan hurts nonetheless. Let’s say you take out a $500,000 mortgage to buy a property worth $950,000, with a 6.0% p.a. interest rate over a 30-year loan term. As it stands, you could pay over $570,000 just in interest to your bank. Yep, that hurts.
Let’s look at how your repayment works
The minimum repayment set by your lender is split into paying both your principal loan amount and the interest. As the interest is calculated on the outstanding balance of your loan at any given time, the earlier stages of your home loan are when you will pay the most interest. As the years go by and you pay off more of the principal loan amount, the interest part of your repayment will decrease and more of the payment will go to reducing your debt. The smaller the remaining loan amount, the less interest you'll be paying.
That’s why looking into reducing interest in the earlier days of your home loan is when it will have the most impact. Let’s check our some strategies:
Get an offset account
You have no doubt heard of an offset account already and - the hype is justified. An offset account is a separate transaction account that is linked to your home loan. The money held in this account is then used to ‘offset’ the interest you will be charged.
Let’s say you have a home loan of $300,000 and you have $100,000 in your offset account. The interest charged on your loan would only be charged on the remaining $200,000 of the loan balance. Many borrowers use their offset accounts as an effective way to reduce the interest they pay by keeping as much of their cash in there as possible - lump sums, commissions, salary payments and savings.
Pay more than the minimum repayments
This is a favourite of ours, because it’s easy to ‘set and forget’ and can go a really long way in reducing your debt. Anything on top of your minimum repayment will go directly to paying down your loan amount and could save you years off your loan term.
A great way to see the impact of additional repayments is via your online banking platform. If you edit your repayments and increase your amount, you should see a summary of the time saved off your loan term. It’s super fun to see what a difference it can make!
Another way of doing this is by switching your repayment from monthly to fortnightly. With 26 fortnights in a year, it’s the equivalent of paying 13 months a year instead of 12 - which could mean a huge reduction in your loan term, and thus interest.
Pay off a lump sum
Sometimes you might find yourself with a lump sum - a bonus, inheritance or tax return - that you weren’t expecting. If you put this lump sum towards your home loan, you will save yourself the interest that would have been due on that amount. There is an argument to keeping this amount in your offset, so you still have access to it if you need it. It really depends on how your home loan (and finances) are set up, but it’s worth doing some quick numbers to figure out what’s going to save you the most in the long run.
Re-price and re-value
Re-pricing is when you approach your current lender for a discount on your rate, and is one of the quickest ways you can save money on interest. In our opinion, re-pricing should be done at least once every 12 months - your lender should be working hard to keep you! You wouldn’t believe the interest rates that banks are offering to attract new customers, while continuing to increase the interest rates for their existing customers. The best way to do this is via your mortgage broker, because they know who to call for a better deal.
Another strategy we use for our clients is ordering a new online valuation of the property attached to the home loan. Sometimes, the property has increased in value, which can put the client’s Loan-to-Value Ratio (LVR) in a lower bracket. On paper, this means you are less of a ‘risk’ for the lender and could trigger a lower interest rate. Often the discount is applied to your loan on the spot.
Refinance your home loan
We know that it’s unlikely that your interest rate is going to stay the same over your 30-year loan term. That’s because the finance market changes really quickly and your interest rate will likely change with it. Refinancing is the process of moving your home loan to a new lender and can be really effective in saving on interest. While it can come with exit fees and costs, most borrowers refinance to take advantage of cheaper rate.
We’re here to help - with a free home loan review
Our Mortgage Choice team in Neutral Bay are here to help! We love helping new and existing clients money on their home loan. Our job is to advocate on your behalf with the lenders, so let us do what we do best! The competition between banks is fierce at the moment, and there are plenty of opportunities to save.
Call: 0414 242 924 Book an appointment
**This information is for education purposes only and does not constitute personal advice. Get in touch with our team to find out what we would recommend for your own personal circumstances.**
