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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:

  1. Make additional repayments
  2. Lower interest and ongoing fees

Even though these two options seem simple enough, there are a number of ways to achieve both these goals:

1. Refinancing

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.

Written by Marcella Garza, of top home loan comparison website Finder.com.au, a free website which aims to help consumers make informed choices when selecting a home loan.
  • This is great advice particularly at the moment with rates and prices like they are.

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  • yeah it’s always great to read financial advice and to learn about things that i never knew about like offset accs. thanks for the advice

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  • Some financial institutions encourtage you to make additional payments but cap the additional yearly amount, or you cop a fee. I know a couple who both work. Both are paid fortnightly – on different weeks. Their mortgage comes out of 2 different bank accounts on alternative payments. When my paretns were buyin g their house their bank used to use part fo your credit balance if they were a little late making the next payment for any reason. They were late once when Dad was sick in hospital and hadn’t received his pay on time. Mum found out they had taken it out of their “credit” paid in advance and there was still some in reserve. Not all banks will do that. Take that into consideration when calculating your additional payments. You never know when you could need money for unavoidable emergency situations.

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  • This is a really good and interesting article. Thanks for the info.

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  • Offset account and extra repayments when possible.. It really helps!

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  • I find this calculator to be very handy too: http://www.loancalc.co.nz

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  • Great Tips thanks for sharing

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  • Really very good knowledge to know! Thanks for sharing this article!

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  • We do try and make extra payments when possible but it’s hard to save any money gives present day costs for everything.

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  • I like the idea of an offset account, it sounds like the way to go.

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  • articles on home loans are very important for me these days because we are considering it. thanks for great tips.

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  • Thanks for these home loan success secrets. Very useful.

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  • Thanks for this- looking to buy in the near future

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  • the bank makes it quite easy to change

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  • thank you sharing this article good read

    Reply

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