Educated first home buyers slash home loans

Educated first home buyers slash home loans

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.

“Today, first home buyers are better informed about how to stay on top of their mortgage,” said Melos Sulicich, chief executive of RAMS.

“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.

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Learn more about home loans

Remaining loan term

The length of time it will take to pay off your current home loan, based on the currently-entered mortgage balance, monthly repayment and interest rate.

How much are repayments on a $250K mortgage?

The exact repayment amount for a $250,000 mortgage will be determined by several factors including your deposit size, interest rate and the type of loan. It is best to use a mortgage calculator to determine your actual repayment size.

For example, the monthly repayments on a $250,000 loan with a 5 per cent interest rate over 30 years will be $1342. For a loan of $300,000 on the same rate and loan term, the monthly repayments will be $1610 and for a $500,000 loan, the monthly repayments will be $2684.

What does going guarantor' mean?

Going guarantor means a person offers up the equity in their home as security for your loan. This is a serious commitment which can have major repercussions if the person is not able to make their repayments and defaults on their loan. In this scenario, the bank will legally be able to the guarantor until the debt is settled.

Not everyone can be a guarantor. Lenders will generally only allow immediate family members to act as a guarantor but this can sometimes be stretched to include extended family depending on the circumstances.

What is a fixed home loan?

A fixed rate home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your repayments will be for the duration of the fixed term. There are some disadvantages to fixing that you need to be aware of. Some products won’t let you make extra repayments, or offer tools such as an offset account to help you reduce your interest, while others will charge a significant break fee if you decide to terminate the loan before the fixed period finishes.

Who offers 40 year mortgages?

Home loans spanning 40 years are offered by select lenders, though the loan period is much longer than a standard 30-year home loan. You're more likely to find a maximum of 35 years, such as is the case with Teacher’s Mutual Bank

Currently, 40 year home loan lenders in Australia include AlphaBeta Money, BCU, G&C Mutual Bank, Pepper, and Sydney Mutual Bank.

Even though these lengthier loans 35 to 40 year loans do exist on the market, they are not overwhelmingly popular, as the extra interest you pay compared to a 30-year loan can be over $100,000 or more.

Does each product always have the same rating?

No, the rating you see depends on a number of factors and can change as you tell us more about your loan profile and preferences. The reasons you may see a different rating:

  • Lenders have made changes. Our ratings show the relative competitiveness of all the products listed at a given time. As the listing change, so do the ratings.
  • You have updated you profile. If you increase your loan amount, the impact of different rates and fees will change which loans are the lowest cost for you.
  • You adjust your preferences. The more you search for flexible loan features, the more importance we assign to the Flexibility Score. You can also adjust your Flexibility Weighting yourself, which will recalculate the ratings with preference given to more flexible loans.

Mortgage Calculator, Interest Rate

The percentage of the loan amount you will be charged by your lender to borrow. 

Why is it important to get the most up-to-date information?

The mortgage market changes constantly. Every week, new products get launched and existing products get tweaked. Yet many ratings and awards systems rank products annually or biannually.

We update our product data as soon as possible when lenders make changes, so if a bank hikes its interest rates or changes its product, the system will quickly re-evaluate it.

Nobody wants to read a weather forecast that is six months old, and the same is true for home loan comparisons.

How common are low-deposit home loans?

Low-deposit home loans aren’t as common as they once were, because they’re regarded as relatively risky and the banking regulator (APRA) is trying to reduce risk from the mortgage market.

However, if you do your research, you’ll find there is still a fairly wide selection of banks, credit unions and non-bank lenders that offers low-deposit home loans.

What happens to your mortgage when you die?

There is no hard and fast answer to what will happen to your mortgage when you die as it is largely dependent on what you have set out in your mortgage agreement, your will (if you have one), other assets you may have and if you have insurance. If you have co-signed the mortgage with another person that person will become responsible for the remaining debt when you die.

If the mortgage is in your name only the house will be sold by the bank to cover the remaining debt and your nominated air will receive the remaining sum if there is a difference. If there is a turn in the market and the sale of your house won’t cover the remaining debt the case may go to court and the difference may have to be covered by the sale of other assets.  

If you have a life insurance policy your family may be able to use some of the lump sum payment from this to pay down the remaining mortgage debt. Alternatively, your lender may provide some form of mortgage protection that could assist your family in making repayments following your passing.

What is a building in course of erection loan?

Also known as a construction home loan, a building in course of erection (BICOE) loan loan allows you to draw down funds as a building project advances in order to pay the builders. This option is available on selected variable rate loans.

Mortgage Calculator, Property Value

An estimate of how much your desired property is worth. 

Mortgage Calculator, Repayment Type

Will you pay off the amount you borrowed + interest or just the interest for a period?

Mortgage Calculator, Loan Amount

How much you intend to borrow.