Five ways to slash your home loan interest bill

Five ways to slash your home loan interest bill

Repaying a mortgage is an expensive business. Even at today’s low rates, the total interest bill can amount to almost as much as the initial loan.  But there are ways to reduce the mortgage quickly and painlessly to save interest.

RateCity spokeswoman, Michelle Hutchison, offers these five tips to slash the interest charged on your home loan.

1. Increase repayments

The more money you put in, the more interest you can save, she says.

“Even the smallest amount of money – literally just over $3 per day – can have a big impact. For the cost of your daily take-away coffee, you could reduce the total interest bill on a $400,000 loan by more than $35,000 and pay a 25-year loan off two years early,” she said.

Use a home loan calculator, such as the one at RateCity, to see how much you could save by increasing repayments on your loans.

Of course, finding extra cash to pop into your home loan is easier said than done.

If your budget is already stretched to the max, don’t despair, she says. There are ways your save tens of thousands of dollars on your mortgage without having to put in an extra cent.

2. Adjust repayments

“Switching your mortgage payment from say, monthly to fortnightly or weekly can help to reduce the amount of interest paid on a home loan.”

The savings, if any, will depend on how your lender calculates repayments and not every loan will benefit. Contact your lender and ask today, because the savings could be significant for very little effort on your part.

3. Use an offset account

Put simply, a mortgage offset is a savings account linked to a home loan and is a tax-friendly way of putting savings to work by reducing interest liabilities.

Assume a borrower has a $300,000 mortgage and $40,000 savings. By moving the savings into an offset account linked to this borrower’s mortgage they would only pay interest against a balance of $260,000.

As far as the Tax Office is concerned, the borrower has not earned interest on the cash deposit, so it’s not included in their taxable income.

4. Negotiate with your lender

Before you think about switching, use RateCity to check and see how your rate and fees compare with others, then contact your lender and ask if they can match the better deal.

“Right now you might be surprised at how much lenders are willing to negotiate,” she said.

5. Refinance to a lower rate

The average standard variable home loan rate is 5.69 percent – and that’s before all lenders have applied the latest round of rate cuts. But there are 240 variable home loans with rates below this in RateCity’s database. Fixed interest rates are at record lows too, with rates available under five percent.

“Refinancing to a lower rate could slash tens of thousands of dollars off your interest bill, so go online and compare home loans – what have you got to lose?”

 

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Learn more about home loans

Interest Rate

Your current home loan interest rate. To accurately calculate how much you could save, an accurate interest figure is required. If you are not certain, check your bank statement or log into your mortgage account.

How can I calculate interest on my home loan?

You can calculate the total interest you will pay over the life of your loan by using a mortgage calculator. The calculator will estimate your repayments based on the amount you want to borrow, the interest rate, the length of your loan, whether you are an owner-occupier or an investor and whether you plan to pay ‘principal and interest’ or ‘interest-only’.

If you are buying a new home, the calculator will also help you work out how much you’ll need to pay in stamp duty and other related costs.

What is an interest-only loan? How do I work out interest-only loan repayments?

An ‘interest-only’ loan is a loan where the borrower is only required to pay back the interest on the loan. Typically, banks will only let lenders do this for a fixed period of time – often five years – however some lenders will be happy to extend this.

Interest-only loans are popular with investors who aren’t keen on putting a lot of capital into their investment property. It is also a handy feature for people who need to reduce their mortgage repayments for a short period of time while they are travelling overseas, or taking time off to look after a new family member, for example.

While moving on to interest-only will make your monthly repayments cheaper, ultimately, you will end up paying your bank thousands of dollars extra in interest to make up for the time where you weren’t paying off the principal.

What happens to my home loan when interest rates rise?

If you are on a variable rate home loan, every so often your rate will be subject to increases and decreases. Rate changes are determined by your lender, not the Reserve Bank of Australia, however often when the RBA changes the cash rate, a number of banks will follow suit, at least to some extent. You can use RateCity cash rate to check how the latest interest rate change affected your mortgage interest rate.

When your rate rises, you will be required to pay your bank more each month in mortgage repayments. Similarly, if your interest rate is cut, then your monthly repayments will decrease. Your lender will notify you of what your new repayments will be, although you can do the calculations yourself, and compare other home loan rates using our mortgage calculator.

There is no way of conclusively predicting when interest rates will go up or down on home loans so if you prefer a more stable approach consider opting for a fixed rate loan.

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 is the best interest rate for a mortgage?

The fastest way to find out what the lowest interest rates on the market are is to use a comparison website.

While a low interest rate is highly preferable, it is not the only factor that will determine whether a particular loan is right for you.

Loans with low interest rates can often include hidden catches, such as high fees or a period of low rates which jumps up after the introductory period has ended.

To work out the best value for money, have a look at a loan’s comparison rate and read the fine print to get across all the fees and charges that you could be theoretically charged over the life of the loan.

How does an offset account work?

An offset account functions as a transaction account that is linked to your home loan. The balance of this account is offset daily against the loan amount and reduces the amount of principal that you pay interest on.

By using an offset account it’s possible to reduce the length of your loan and the total amount of interest payed by thousands of dollars. 

Example: If you have a mortgage of $500,000 but holding an offset account with $50,000, you will only pay interest on $450,000 rather then $500,000.

How do I calculate monthly mortgage repayments?

Work out your mortgage repayments using a home loan calculator that takes into account your deposit size, property value and interest rate. This is divided by the loan term you choose (for example, there are 360 months in a 30-year mortgage) to determine the monthly repayments over this time frame.

Over the course of your loan, your monthly repayment amount will be affected by changes to your interest rate, plus any circumstances where you opt to pay interest-only for a period of time, instead of principal and interest.

What is 'principal and interest'?

‘Principal and interest’ loans are the most common type of home loans on the market. The principal part of the loan is the initial sum lent to the customer and the interest is the money paid on top of this, at the agreed interest rate, until the end of the loan.

By reducing the principal amount, the total of interest charged will also become smaller until eventually the debt is paid off in full.

How do I refinance my home loan?

Refinancing your home loan can involve a bit of paperwork but if you are moving on to a lower rate, it can save you thousands of dollars in the long-run. The first step is finding another loan on the market that you think will save you money over time or offer features that your current loan does not have. Once you have selected a couple of loans you are interested in, compare them with your current loan to see if you will save money in the long term on interest rates and fees. Remember to factor in any break fees and set up fees when assessing the cost of switching.

Once you have decided on a new loan it is simply a matter of contacting your existing and future lender to get the new loan set up. Beware that some lenders will revert your loan back to a 25 or 30 year term when you refinance which may mean initial lower repayments but may cost you more in the long run.

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.

Savings over

Select a number of years to see how much money you can save with different home loans over time.

e.g. To see how much you could save in two years by switching mortgages,  set the slider to 2.

Monthly Repayment

Your current monthly home loan repayment. To accurately calculate how much you could save, an accurate payment figure is required. If you are not certain, check your bank statement.

How can I get ANZ home loan pre-approval?

Shopping for a new home is an exciting experience and getting a pre-approval on the loan may give you the peace of mind that you are looking at properties within your budget. 

At the time of applying for the ANZ Bank home loan pre-approval, you will be required to provide proof of employment and income, along with records of your savings and debts.

An ANZ home loan pre-approval time frame is usually up to three months. However, being pre-approved doesn’t necessarily mean you will get your home loan. Other factors could lead to your home loan application being rejected, even with a prior pre-approval. Some factors include the property evaluation not meeting the bank’s criteria or a change in your financial circumstances.

You can make an application for ANZ home loan pre-approval online or call on 1800100641 Mon-Fri 8.00 am to 8.00 pm (AEST).