A home loan is the biggest debt most of us will ever have, but it’s a necessary one if you want to own a home. And if you can find ways to cut down the cost of your home loan you can save yourself literally thousands of dollars.
Here are 5 ways to do just that.
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1. Shop around for a better (lower) interest rate
The biggest way to save money on your home loan is with a lower interest rate. The lower the rate, the less interest you’re charged and the smaller your repayments will be.
Given that a home loan debt can stay with you for decades, even the smallest difference in your interest rate has a big impact on your costs.
If you borrowed $500,000 over 30 years, with an interest rate of 2.34% you would have monthly repayments of $1,934.
And you’d end up paying $196,334 in interest over that time. You can use a mortgage repayment calculator for accurate and quick computation.
But if your rate dropped by just 10 basis points to 2.24%, your monthly repayments would fall to $1,908. That would save you $26 a month or $312 a year.
And you’d pay $187,125 in interest over 30 years. That’s $9,209 less interest, because of a slightly lower rate.
The best way to get a lower interest rate is to compare rates from as many lenders as possible rather than just going with your own bank.
2. Ask for a discount
Another way to trim your interest rate is to ask for a discount. Asking is free, and the worst your lender can do is offer a polite no.
This tip works for new customers in the application stage, but also works well for borrowers who already have a loan.
Just ask.
Last year I noticed that my variable rate loan was still around 2.50%, but my lender was offering the same loan at less than 1.90%. All I did was call them and ask to be moved to the lower rate.
It took me 10 minutes to save a lot of money.
3. Use an offset account to your advantage
If your home loan has a 100% offset account, you have another way to unlock big savings.
Put simply, an offset account is a bank account attached to your home loan. You can save money in it, and spend it as you need it. But you don’t earn interest.
Instead, every dollar you save in the offset account reduces the interest your lender charges. If your loan principal is $400,000 and you have $10,000 saved in the offset, your lender calculates your daily interest charges on $390,000.
You still pay the same amount each month, but you’ll end up paying the loan off faster. And the more you save in the offset, the less interest you pay.
Not every home loan has an offset account, though. If yours doesn’t, you can probably make extra repayments instead. This will also reduce your interest charges and save you money.
But an offset account is more flexible. It’s harder to pull extra repayments out of your loan if you need to spend the money.
4. Make fortnightly repayments
This is a simple but effective trick to save on your mortgage. There are 12 months in a year, but there are not 24 fortnights. There are 26. Switching to fortnightly repayments effectively gives you 1 extra repayment cycle in a year.
It just means you’re paying off your debt slightly faster. Again, over many years, this adds up.
Check with your lender to ensure that they allow fortnightly payments. Some lenders may only permit monthly payments, while others may offer a bi-weekly option that aligns with your pay schedule.
Be clear on the frequency of your payments. A fortnightly payment means making half of your monthly payment every two weeks. Ensure your lender properly allocates these payments to your mortgage principal.
Fortnightly payments may be more convenient for those who receive their income bi-weekly. However, it’s essential to budget effectively to have enough funds for each payment without causing financial strain.
Some lenders calculate interest daily. More frequent payments can reduce your average daily balance and, therefore, reduce the overall interest paid. Understand how your lender calculates interest to see how much you’ll save.
Additionally, consider making extra payments when possible. This can further accelerate your mortgage payoff and reduce the total interest paid.
You can set up automatic payments, so you won’t miss any due dates. This ensures you stay on track with your mortgage repayment plan.
Remember that making fortnightly mortgage payments is just one effective strategy to manage your mortgage. It’s important to assess your overall financial goals and circumstances to determine if this approach suits you.
5. Beware of ongoing fees
The fees on a home loan matter much less than the interest rate, but avoiding big fees is still wise.
Many loans have one-off upfront application fees that can cost as much as $600. However, the biggest fee is the yearly fee that often comes with package loans.
A package home loan lets you combine multiple bank products (a credit card, a loan, an offset account) with a single annual fee that often costs around $400.
If the loan is a good deal and the package has other benefits, it might be worth it. But make sure you factor in the fee costs and see if a low-fee loan can get you similar benefits for less.
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