In a sign that the Reserve Bank of Australia’s (RBA) decision to cut interest rates in recent months is starting to bite, research shows borrowers are making more than the minimum loan repayments in a bid to slash their home loan liabilities.
In fact, with a combination of strategies, it’s possible to strip $100,000 in additional interest from a $300,000 mortgage.
“Normally, the bulk of mortgage repayments over the first five years go towards repaying the interest, and not the principal on the loan.
“In these early years, first home buyers should maximise their repayments in order to make the greatest impact on the calculated interest.”
Likewise switching mortgage payments from monthly to fortnightly repayments can drastically slash additional interest repayments, depending on how your lender calculates the repayments.
“Paying fortnightly can actual add 13 monthly repayments per annum instead of 12. Over a 25 year term, this could reduce the loan by four and a half years and save around $65,000 in interest on the average $300,000 home loan,” explained Sulicich.
Contribute an extra $25 a week, and it’s possible to save another $42,000 in interest on a $300,000 home loan, according to RateCity. To see how much you could save with extra repayments, try using a home loans calculator, such as the one at RateCity.
Paul Clitheroe, chairman of the Australian Government Financial Literary Board, said reducing the term of the loan is another way for new mortgage holders to slice additional interest payments and pay down the principal faster.
“If you have $300,000 mortgage at an interest rate of 5.5 percent, expect to pay more than $250,000 in interest over 25 years,” explained Clitheroe.
“However, if you reduce the loan term to 17 years, while your monthly repayments would rise by $400 a month, you would slash your total interest bill by over $85,000.”
Furthermore, Alex Parsons, CEO of RateCity.com.au added that knocking tens of thousands of dollars off a mortgage can be as simple as switching lenders.
“If you are paying 5.5 percent or more in interest the current market, you are paying too much and should consider switching lenders,” he said.
“At 5.5 percent on a $300,000 loan, you are paying over $250,000 in interest over 25 years. Switch to an interest rate of 5 percent and you could potentially save over $25,000 in interest, making it good sense to shop around.”
For more information about slashing your home loan, compare home loans here.