Over the term of an average home loan, interest charges can add up significantly. However, there are ways to save tens of thousands of dollars over the life of your loan.
Check your home loan interest rate
The most obvious way to lower your mortgage costs is to seek a better interest rate.
Our Macquarie repayments calculator shows a $450,000 principal and interest mortgage with monthly repayments, charging 5% interest, would amount to $419,651 in interest paid over a 30-year term. If we cut the interest rate by just 0.25%, to 4.75%, while keeping all other loan variables the same, interest over a 30-year term falls to $395,069.
Carolyn Bray, Head of Credit at Macquarie’s Banking and Financial Services Group, says, “Look at your home loan rate, and consider whether it’s still competitive in market. When's the last time you looked at it? Some borrowers who got a home loan a decade ago would be on a very different deal to what’s available in the market now. Speak with your bank or your mortgage broker, and make sure you’re not paying more than you should be.
“A 0.25% reduction in your interest rate may not seem like it would make that much of a difference, but it can really add up over the term of the loan.”
Get the most out of the features of your home loan account
The features of your loan can often be just as important to minimising costs as your home loan rate. In this sense, 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 help you save and spend smarter, freeing up money for extra repayments.
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 loan balance you pay interest on. With an offset starting balance of $10,000 you’d save around $30,155 and pay off your loan a year earlier, on the same $450,000 mortgage with an interest rate of 4.75%.
Pay more now, less in the long run
Of course, you could also lower the balance by paying more off the loan.
Our Macquarie extra repayments calculator shows that 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 $27,516.25 off the total interest charged, and 1 year and 9 months from the term of the loan.
“It’s important to understand your cash flow and budget,” says Bray.
“Think about whether you can afford to pay more than your minimum payments. If you pay more on an ongoing basis, it not only reduces the interest you're paying, it’ll help you pay your loan off faster.
“If you get a bonus, or a windfall in some way, put at least some of it towards your mortgage. Again, you're reducing the size of your loan and reducing your long-term interest cost over time.”
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 pay cycle.
Considering the $450,000 home loan above again, the monthly repayments required on the loan charging 4.75% would be $2,347.41. By paying $586.85 a week, you would save more than $70,000 in total interest payments and shave four years off the loan term, as our Macquarie repayments calculator shows.
It just goes to illustrate, small changes today can make a huge impact over the lifetime of your home loan.
- Check your interest rate with your bank or mortgage broker – make sure it’s still competitive in the current market.
- Use your offset account smartly – money you put in an offset works to reduce the loan balance you pay interest on.
- If you get a bonus from work, or have an unexpected windfall, allocate some of it towards paying off your home loan.
- If you can, make additional payments each month – they soon add up!
Make sure you’re getting the right home loan for you. Speak to one of our specialists today by calling 13 62 27.