Repaying a home loan is one of the life essentials. Owning your home outright is a worthy goal. When done cleverly, it can save your skin in retirement. Paying off your mortgage early in life can enable you to use the money you’d normally set aside for repayments to go into investments.
I’ll put it this way, a mortgage is forced savings and investment. Make smart use of it. Other bills like utilities and the credit card don’t make money for you. So it makes sense to put some extra thought towards your home loan options.
There are only two fundamental ways to save money and years on a mortgage:
- Make additional repayments
- Lower interest and ongoing fees
Even though these two options seem simple enough, there are a number of ways to achieve both these goals:
Switching to a lower rate of interest on your home loan often isn’t a big a hassle as many people think. Visit a comparison website before the call to give you a good indication of the lending rates on the market.
According to the MFAA, around a third of refinancers stay with the same lender, which is a good first port of call. Use your knowledge of the leading interest rates to steer the conversation in your favour. Many lenders have entire call centre teams dedicated to meeting your demands in order to keep you from switching.
If your lender doesn’t get you a better rate, it’s worth asking your lender for the full fee quote to discover how much it will cost you to exit the loan. Try not to leave to loan until you have decided that these costs are worth bearing as well as loan entry costs. Common entry costs are application fees, transfer fee, settlement fee and valuation fee. For an online home loan with a competitive rate and an offset account, this should be around $300-700.
Use this home loan comparison calculator to compare your current loan with a reduction in interest rates or fees.
Other things to consider when refinancing are more features and flexibility and better customer service.
Don’t fear the smaller online lenders. They have lower overheads due to their lack of branch presence, and are able to pass these savings onto their customers — even though they are typically funded by major institutions. Not only that, these lenders usually have highly experienced and helpful call centre staff, which results in great customer service.
2. Offset accounts
An offset account is a transaction account linked to a home loan, where the balance of the account offsets the interest calculation on a home loan. The result is interest savings.
Consider keeping a balance of $10,000 in a 100% offset account on a $400,000 mortgage. Interest is calculated only on $390,000 ($400,000-$10,000).
This can cut 1 year off the life of the loan, saving $16,375 in interest (even at today’s favourable interest rates.) And that’s before you make your monthly contributions to add to the offset balance.
3. Make extra repayments
Repaying above and beyond takes discipline. Many of us struggle to keep up with mortgage repayments as they are at present. But picture this, your mortgage interest rate has fallen by 0.5%, to 5.20% p.a. on a $400,000 mortgage. If you were to keep repayments up to the level they were at previously, you’d save $33,457 in interest and be debt-free two-years-and-three-months earlier. You don’t miss what you don’t already have!
Use this extra loan repayment calculator to see how much you can save.
It is helpful to know that extra repayments allow scope for redraw and repayment holidays (taking a break from mortgage repayments). Redraw can be useful to pay for home improvement costs, while repayment holidays are useful when times become especially tight around holiday season and on family holiday trips
4. Repay weekly or fortnightly
Making weekly or fortnightly instead of monthly repayments can save thousands of dollars and save time on a mortgage. Interest is calculated daily on a home loans — more frequent repayments reduce the time interest has to accumulate. Paying this way also increases the total repayments you make each year.
One thing to remember is that becoming proactive with your home loan has never been easier. There are plenty of options to save you money and achieve your goals faster.