Borrowing money to buy a home is often an expensive and long-term commitment for many Australians. Mortgages are usually taken out for a term of 25-30 years. Many individuals often take a ‘sign and forget' approach to their mortgage despite it holding such significant value.
Have you ever wondered how you can beat the bank on a home loan? How can you get a fair deal and not end up paying double the price of your house? You can use some tips and tricks to keep more money in your pocket and take control of your relationship with your lender.
1. Be realistic about what you can really afford
Everyone wants to live the Australian dream of having their own home in their dream neighbourhood. However, depending on where this is, you might have to borrow a large amount that you may later struggle to repay.
You also need to remember your financial commitment isn’t just about repaying your home loan; there's more to it. You need to budget for running costs such as household bills, council tax, insurance and maintenance. So before you make a decision, consider calculating what you can actually afford without causing financial stress and consider adding a buffer for unforeseen circumstances.
2. Make extra repayments
If you can pay more than your set repayments every month, you can pay off your mortgage much faster. But, of course, you only benefit from this if your lender allows overpayments, or you may have to pay an additional charge.
For instance, if you were to borrow $200,000 at an interest rate of 2.5 per cent, with monthly repayments of $898, you'll be debt-free after 25 years. But if you decide to pay an extra $100 per month, your monthly payments will be $998. So by making extra repayments, you could save up to $9949 in interest and pay off your loan in 21 years and nine months.
Lenders may offer unlimited extra repayments, or may limit the overpayments you can make (e.g. up to 10% per year). Extra repayments are more likely to be limited on fixed-rate home loans. Before you start planning to pay extra, confirm with your lender their specific terms.
3. Make a one-off lump sum payment
If you happen to save a big chunk of money, or get a bonus or other type of unexpected sum, you can put it into your mortgage. This will again depend on your home loan terms and help you pay off your home loan sooner.
If we reuse the example from the last point, you owe $200,000 with a loan term of 25 years and an interest rate of 2.5 per cent. By making a one-time payment of $5000, it will save you $4239 in interest charges and help you repay your mortgage ten months sooner.
The more money you can afford to add to your mortgage as lump sums, the more you may be able to save more in interest and the sooner you may be able to repay your mortgage.
4. Make use of an offset account
An offset account is similar to a standard transaction or savings account where you can deposit, withdraw, or transfer money as and when you like.
The difference between an offset account and a regular bank account is that your offset account is linked to your home loan. So, when your lender calculates the interest to charge on your home loan, the money in your offset account is also included in the calculation.
Imagine you owed $200,000 on a principal and interest home loan with 25 years to repay. With a 2.5 per cent interest rate, you would pay $898 per month. Now consider you have an offset account, where you have $10,000. This means you would be charged interest on your home loan as if you only owed $190,000. So now, you would continue repaying $898 every month, but you could pay off your mortgage in 23 years and four months and save $8283 in interest - all because of the amount you have in your offset account.
There may be many other strategies available to beat the banks on mortgages and take control of your finances. You may want to consult a mortgage broker before deciding on a course of action, as they can offer advice based on your circumstances.