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How to lower your mortgage repayments
Servicing a mortgage is generally a decades long, costly process. Home loans typically last for 25-30 years. Reducing your mortgage repayments can potentially save you thousands of dollars over the life of your loan.
There are many reasons you may want to lower your mortgage repayments - your household budget may be vulnerable to mortgage stress, your personal financial situation may have changed (i.e. job loss, redundancy, pregnancy, income reduction) or you simply want to seek out the best possible deal.
You can tackle this issue in a number of ways but the first thing to do is to extensively research the different options that are available. Understanding your choices and alternatives can provide a solid foundation from which to seek out the best opportunity. Arming yourself with the relevant information means you’ll be better prepared to engage in financial negotiations with lenders.
Negotiate with your lender to reduce repayments
After you’ve done your research it may be advantageous to reach out to your current lender to see if they’re willing to negotiate a lower rate on your existing home loan. If your lender is charging you a higher interest rate than that of new customers, you could request a lower rate.
If you have a good credit score and always make timely repayments, your lender may not want to lose your business and might offer you an interest rate discount or perhaps waive some fees.
Lenders may also provide special discounts to professionals like doctors, lawyers and accountants, who typically have stable jobs and high incomes due to the critical nature of their work. If you belong to any of these professions, it may help you negotiate an interest rate discount with your lender (or while refinancing) to potentially reduce your monthly repayments.
If this process seems overwhelming, you could enlist the services of a mortgage broker to negotiate on your behalf.
If you’re struggling financially, you may want to inquire with your lender about extending the term of your home loan. While most lenders offer 20 to 30 years mortgages, you can find lengthier terms. The longer your home loan, the less you’ll pay per month in principal and interest repayments.
Although you'll make lower repayments, your total interest charges over the life of the loan may drastically increase, as can be seen in the table below.
| Term | Monthly repayment | Change if you increase loan term | Total interest payable over life of loan | Change in interest costs if you increase loan term | ||
| 25 years | 30 years | 25 years | 30 years | |||
| 15 yrs | $4,249 | -$994 | -$1,216 | $247,925 | +$190,905 | +$294,503 |
| 20 yrs | $3,614 | -$359 | -$581 | $340,541 | +$98,288 | +$201,886 |
| 25 yrs | $3,255 | -$222 | $438,829 | +$103,598 | ||
| 30 yrs | $3,033 | $542,427 | ||||
RateCity calculations assume an average existing customer with a loan balance of $500k and a variable rate of 6.11% after nine interest rate hikes, plus Westpac's cash rate forecast.
Before committing to a new arrangement, remember to investigate all options to ensure you’re getting the best deal.
Refinancing to lower mortgage repayments
If you’ve managed to build up some equity in your property, you may be in a position to refinance your home loan with another lender, who may charge a lower interest rate, thus allowing you to possibly make lower repayments and relieve some pressure on your budget.
If you think that you’re paying too much for your current home loan, or if you are currently in mortgage stress, it may be worth considering refinancing. The interest rate, ongoing fees, features and benefits offered by another lender may better suit your personal goals and financial needs, now and in the future.
You could also score cashback offers but you’ll want to be sure that the interest rate and other features are competitive before refinancing. If you take a cashback deal consider using it to pay down your debt.
Refinancing could be a sensible option in a rising-rate environment. When the Reserve Bank of Australia (RBA) hikes the cash rate, your lender will likely raise its variable home loan interest rates. If you’re on a fixed rate home loan and the cash rate rises, when your fixed period ends it’s likely your rate will revert to a higher standard variable rate. In this scenario, refinancing at the end of your fixed term could be a competitive way to reduce your repayments.
However, it’s important to be mindful of your loan term when you refinance. For example, if you’re 10 years into a 30 year home loan and you switch to another 30 year home loan, you may be in debt for 40 years or longer. Although your new loan may offer a lower interest rate, you could end up paying more in total interest over the life of the loan unless you make a concerted effort to clear your principal faster by making extra repayments.
Refinance to interest-only repayments
If you’re struggling to meet mortgage repayments, refinancing to an interest-only home loan may offer some relief.
Interest-only repayments mean you pay interest charges on your loan and leave your principal untouched. This repayment option doesn’t get you any closer to paying off your loan but does lower repayments, albeit temporarily.
Lenders tend to offer interest-only repayments for a fixed period, such as five years for an owner-occupied loan or 10 years for an investment loan. Plus, you’ll likely pay more in total interest charges over the life of your loan.
If you refinance but decide that you’re unhappy, you’ll likely need to begin the entire refinancing process all over again. This includes reapplying and paying a second set of discharge fees and upfront fees.
Switching lenders may help save on repayments but you might want to consider these six points before refinancing.
Making extra repayments to lower servicing costs
By making extra home loan repayments on top of your obligations, you may be able to shrink your home loan principal and therefore reduce the interest charged on your mortgage. Most borrowers make regular principal and interest repayments each month, fortnight or week. These are often the minimum repayments as stipulated by the lender.
However, many lenders will allow you to make extra repayments, either above the minimum cyclical amounts or by adding one-off lump sums when you can afford it. Lenders may allow you to make unlimited extra repayments, or they may cap how much extra you can pay towards reducing your mortgage each year.
Any extra repayments you make go towards paying down your loan’s principal. The interest charged on the loan repayments is calculated based on your remaining principal. This means that the more you pay down, the less interest you may be charged on your repayments.
Keep in mind that even if you make enough extra repayments to lower your interest charges, many lenders will automatically keep your home loan repayments the same unless you specifically ask for them to be lowered.
If you’re really struggling with your mortgage debt, you could also consider contacting a financial counsellor.
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Product database updated 03 May, 2024
