Simple steps to cutting mortgage costs
Over the term of an average home loan, interest charges can add up to hundreds of thousands of dollars on top of the amount borrowed. Interest on the mortgage you use to buy your primary residence is not tax deductible, it’s purely a cost. But there are ways to save tens of thousands of dollars over the life of the loan.
The less interest you pay, the more you’ll have available to invest elsewhere or spend as you wish.
Check your deal
The most obvious way to lower your mortgage costs is to seek a better interest rate.
Just to illustrate the difference, a $450,000 mortgage charging 5% would cost $419,651 in interest over a 30-year term, for example.
Use the features
While rate is important, it’s not the be all and end all of minimising costs. In some cases, it might be worth opting for a mortgage with a slightly higher rate, if its features can bring other forms of savings.
Mortgages may have features that can cut costs in other areas of your budget, freeing up cash for extra repayments.
Packaging financial products, like credit cards, with your home loan can save on fees. Some loans offer access to rewards programs which let you accrue points that can be redeemed for goods and services, such as, flights that you would otherwise have paid for out of your own pocket.
Offset accounts can be used to cut interest costs by lowering the balance of the loan on which interest accrues. By holding $10,000 in an offset account against the same $450,000 mortgage discussed above charging 4.59%, you would save more than $28,000 over the loan’s term and repay the debt one year sooner.
Pay more now, less in the long run
Of course, you could also lower the balance by paying more off the loan. There are several ways to do this without really noticing.
Recent research from Deloitte suggests that around 75% of Australian home owners have been using the low rates to get ahead on their mortgages, saving on interest costs in the process.
Many people who have variable rate loans have got ahead by continuing to pay a constant amount off their mortgages even as interest rates were cut. By doing this, you’re paying more than is necessary with no change to your budget compared with before the rate was cut.
Continuing to pay the higher amount on a $450,000 loan over 30 years after a 0.25% rate cut (from 5% to 4.75% in this example) will shave almost $47,000 off the interest charged over the term of the loan.
Another approach is to pay fortnightly or weekly rather than monthly. For this to make a meaningful difference to the total interest cost, you need to pay half the monthly amount each fortnight, or one quarter of the monthly amount every week. This can be particularly useful if you’re paid on a bi-monthly or weekly cycle.
Considering the $450,000 home loan above again, the monthly repayments required on the loan charging 4.59% would be $2,304. By paying $1,152 each fortnight or $576 a week, you would save more than $65,500 in interest over the loan’s term and repay the debt almost four and a half years sooner.
Additional lump sum payments also make a difference. If you receive an irregular bonus or dividend payments for instance, you could direct these amounts into your mortgage on an ad-hoc basis.
Many mortgages that offer pre-payment options allow you to redraw if you wish to spend the money in future.