How to save money on your home loan when interest rates are low
Now is the ideal time to save money on your home loan as the cash rate in Australia has been kept at a record low 2 per cent for three consecutive months by the RBA. This low rate has allowed many home owners to get in front and save large amounts on their home loans. If your not capitalising on the current low rates to save money on your home loan, below are a few things to consider before rates inevitably rise again in the future.
1. Fix your home loan rate
A fixed home loan means locking your interest rate at a set amount for a period of time. Fixing your interest rate when rates are low can save you a lot of money if there is a turn in the market and rates go up. Paying just a half percent less with a fixed rate will have a huge impact on your ability to save money on your home loan. This option gives you security in knowing exactly what your repayments will be each month. Another option is to split your loan so a percentage is fixed and the rest is variable. You can check what the different repayments will be on your loan using our split rate calculator . A Mortgage Broker can advise you on what the best options would be for your particular circumstances and how your repayments will vary by fixing or splitting them.
2. Increase you repayment amount
Taking advantage of low interest rates by paying more on your home loan repayments each month has multiple benefits. You will save on interest down the track because you have reduced the principle amount of your home loan. Making additional repayments now will also give you a buffer if rates rise or if you have financial difficulties in the future as you will be in front on your mortgage. Increasing your repayments does not have to be a set strategy with your financial institution, you can simply pay more on your monthly repayment by whatever you can afford for that month.
3. Increase your repayment frequency
Instead of increasing the amount you pay each month, you can save money on your home loan by increasing your repayment frequency. By switching your repayments from monthly to either fortnightly or weekly, you can pay off more of the principle on your loan and save on interest. For example, if you pay $1000 a month on your home loan repayments, this adds up to $12,000 annually. If you change your repayments to $500 a fortnight, over the year you would pay back $13,000 because there are 26 fortnights in a year. This would put you a full month ahead on your home loan each year. In addition to this, because interest rates are usually calculated daily by the banks, making payments each fortnight or each week will reduce the amount of interest you’ll need to pay over the life of your loan.
Ensure you have a redraw facility
If you choose to increase the amount you pay or the frequency of your repayments, make sure you have a redraw facility attached to your Mortgage. This is a facility that allows you to redraw any extra payments you have made on your loan in case you need the money for other things.
If you would like more information on changing your loan or your repayments, speak to one of our Mortgage Brokers today.