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?”