Reduce your home loan and pay less interest with very small changes
You can easily reduce your home loan and pay less interest with a variety of very small changes that won’t have a big affect on your day to day finances. Many people think that the only way to save money on a home loan is to pay large amounts of additional repayments that they just can’t afford – this is not the case. There are many small changes that you can make that will dramatically reduce both the amount of interest you pay over the life of your loan and the years it takes to pay off.
1) Change your monthly repayments to fortnightly.
Simply calculate how much you pay each month, divide that figure by 2 and pay this new amount each fortnight. As demonstrated in the example below, by switching payments from monthly to fortnightly, a home loan of $400,000 with an interest rate of 5% pa, the home owner would save a total of $68,199 in interest payments and the loan would be paid off 4.5 years faster.
|$400,000 loan at 5%||Paying Monthly||Paying Fortnightly|
|How long will it take to repay loan||30 years||25.5 years|
|Total interest paid on the loan||$373,280||$305,081|
2) Round up your repayment by $10
Every $1 you pay over your minimum repayment is counted as an additional payment and that amount comes straight off the principal (the balance of your loan). The more you can reduce your principal, the less interest you pay. Using the loan example above, a 30 year mortgage of $400,000 at 5%, your monthly repayment is $2,148. If you increase this figure to $2,160, you only pay an extra $12 every month but you will save $6,480 in interest over the life of your loan and the loan would be paid off 5 months earlier. Try our online Extra Mortgage Repayment Calculator to see how much a very small increase could save you.
3) Be aware of loan fees
Many people take out a home loan because it appears to have a lower interest rate but don’t take into consideration the terms and conditions of the loan and the fees they may be paying. Depending on your loan, fees can be charged for every redraw or additional payment you make as well as monthly or annual administration fees, establishment fees and more. All of these fees are taken out of your repayment so if they can be reduced, that money will go onto reducing your loan instead of going to your lender. Your lender is required by law to provide you with details of all the fees associated with your loan. If these fees are high or if your paying ongoing fees for services you no longer require, a Mortgage Broker can give you advice on other types of loans and different lenders who have lower fees that will suit your specific needs.
4) Consolidate your debts
Home loan rates are always lower than the rates of personal loans, car loans and credit cards. If you are currently paying off other debts, you can save a lot of money by consolidating all your loans. This means you refinance your home loan to pay out all the other debts. You now have only one debt with a much lower interest rate than you were previously paying. You can use the money you save for your daily spending needs or put it directly onto your home loan balance.
5) Don’t change your repayments when interest rates drop
Lenders usually determine their interest rates based on the Reserve Bank of Australia’s cash rate which is reviewed every month. If you have a variable rate home loan, try to maintain the amount you are currently paying on your mortgage when interest rates drop. By doing this you will ultimately be reducing the principal (loan balance) much faster and will therefore be paying less interest and will reduce the amount of time left on your loan.
6) Consider an offset account
An offset account is an additional account set up by your lender, usually a type of savings account, which is linked to your home loan. The balance of this account is offset daily against your home loan, reducing the interest payable on that loan. If you have a 30 year mortgage of $400,000 at 5% and you have an offset account that maintains an average of $5,000, you would save $16,900 in interest over the life of your loan and the loan would be paid off 8 months earlier. Not all loans have an option for an offset account, and some lenders charge an annual fee for an offset account so you need to ensure the fee you pay is outweighed by your saving. Your mortgage broker can give you more advice on the pros and cons of an offset account and options for changing to a loan that has this feature or getting rid of this feature if it’s not saving you money. Try our online Mortgage Offset Calculator to see how much you could save with an offset account.
7) Have income paid directly to your home loan with a free redraw facility
An alternative to an offset account is to have a home loan with unlimited free redraw on additional funds. Interest rates are calculated daily on your home loan so any additional funds, on top of your minimal repayments, will reduce the amount of interest you pay. If you have your wages or other income sources such as rent, dividends, child support etc paid directly into your home loan account, you will save money on interest for as long as that money sits on your home loan. You can then redraw that money, free of charge as you need it.
8) Pay all your monthly expenses with a credit card.
This option takes solid budgeting and discipline – and it’s not for everybody. If you pay all your expenses with your credit card, you can leave your full income in your home loan for the entire month, reducing your interest repayments. At the end of the month, just before your credit card repayment is due, withdraw the full amount of your expenses and pay out your credit card in full. This strategy ensures the maximum amount of available cash you have is sitting on your home loan for the longest possible amount of time, saving you thousands of dollars in interest over the life of your loan.
9) Review your loan and consider other lenders
There are hundreds of different home loans available in Australia and the difference in interest rate can be as much as 2%. Lenders are continually changing the loan products they offer to compete for your business and what was a good loan a few years ago may now be costing you thousands in excess interest or account fees. You may also be paying for loan features that you don’t require. Home owners should have a loan review every two years to make sure you are saving as much as possible. A good mortgage broker can look at your specific needs and then compare all the loans on the market to find the best options for you, this is a free service so you have nothing to lose. There may be a better loan with your current lender that they havn’t advised you of or you may need to switch to a different lender. There are now many small banks & specialist lenders on the market offering much more competitive loans than the big banks. Click here for more information on having a loan review.
If you have a 30 year mortgage of $400,000 at 5%, with just a half % interest rate decrease to 4.5%, you will save $43,653 over the life of the loan. Try our online Mortgage Repayment Calculator to see how much you could save with a lower interest rate.
Proceed with Caution
Before making any changes to your mortgage, it is essential to understand the terms and conditions of your current loan and be aware of any fees you may have to pay. A Mortgage Broker can help you by calculating all the fees to ensure the pros outweigh the cons, and give you the best advice on how you can reduce your home loan and pay less interest with very small changes.
* Reduce your home loan and pay less interest with very small changes