How to save money with your home loan

It may sound hard to believe, but it is possible to save money with your biggest expense – your home loan. You may be able to reduce your repayments and also grow a savings nest egg through your mortgage.

There are two main pathways you could consider exploring when it comes to saving money with your home loan: reducing your repayments and growing a savings nest egg. Let’s explore the benefits and risks of these options.

Save money by lowering your repayments

Homeowners may be able to save money on their mortgage repayments through several options, depending on their financial situation and the lender they choose. Here are two of the most common.

• Make extra repayments

If your home loan allows you to make additional repayments without penalty, you could be able to chip away at your principal faster. By reducing your home loan amount, you may be able to shave years off your loan term and, in turn, reduce the interest charged on your home loan over time.

Interest charges are some of the most significant expenses associated with a home loan. While it may seem counter-intuitive to spend money to save money, making extra repayments (like $50 a week) into your mortgage could save you tens of thousands of dollars in interest charges on an average mortgage.

It won’t save money in the short-term. But in the long-term, you could save yourself a significant sum in interest payments.

• Compare and refinance

Another option to consider if you’re hoping to save money on your home loan is to refinance to a lower rate and/or lower fee option. Again, this is about reducing the amount of interest you pay on your loan.

Switching to a more affordable home loan with either a lower fee and/or lower interest rate will help reduce your monthly mortgage repayments. This could potentially save you thousands in interest charges over the life of your loan.

To know if a more affordable home loan is on the cards for you, it may be worth regularly reviewing home loan options in the market. Use comparison tools, like RateCity’s Refinancing Comparison Table, to filter down your options and see how your current home loan compares.

For example, a homeowner on a $500,000 home loan with 25 years remaining paying a rate of 3.50% would pay $2,503 per month. But by refinancing to a lower interest rate of just 3.00%, their new monthly repayments would be $2,371.

This is a savings of $132 a month or $1,584 in just a year. That’s enough for a weekend away or to pay for a years’ worth of energy bills.

Repayments on 25-year $500k home loan when refinancing

Source: RateCity.com.au. Note: Hypothetical scenario based on 25-year, $500,000 home loan. Does not factor in fees or rate changes.

Grow a savings nest egg with your home loan

Another way you could save money while paying your home loan is by increasing your nest egg (while reducing your home loan costs).

Keep in mind that there is more to a home loan than the features offered and it’s crucial you also compare interest and fees, amongst other factors, as well.

Here are some of the more common options.

• Offset account

An offset account is a home loan feature that allows homeowners to deposit funds into an everyday bank account. The balance in this account helps to reduce or ‘offset’ your home loan interest, meaning that any funds you put in this account may reduce your interest charges.

The benefit of this type of account is that you can grow a savings nest egg and reduce your interest charge, while you repay your mortgage. In terms of saving money on your home loan, an offset account could offer the best of both worlds.

• Redraw facility

A redraw facility is another home loan feature that allows you to build up a savings nest egg that works to reduce your interest owing on the home loan. Typically, a lender will allow you to make extra repayments without penalty towards your loan principal, and these extra repayments are able to be drawn down upon when needed, such as for a home renovation.

This may sound similar to an offset account, but there is a difference. An offset account typically gives you easy access to your savings via ATM or direct debit, as it is an everyday account. A redraw facility on the other hand may offer the same flexibility, with some lenders setting minimum redraw amounts or limiting your ability to redraw money from an ATM or debit card. This can be beneficial for homeowners who are easily tempted to spend and prefer their nest egg to not be easy to access.

Of course there are always other ways to save and cut costs, but these will all depend on your individual situation. We’ve listed some of the most popular options, but if you are unsure or want advice tailored to your individual situation, speaking to a licensed financial professional could be beneficial.

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