A home loan is likely the biggest debt you’ll ever get yourself into. But far from being a money pit, a home loan represents just another tool of money management. By using it strategically you can reduce your interest costs and make your mortgage work for you.
And you can start today.
1. Take a look at your interest rate (right now)
This is probably the biggest way to save on your home loan. Interest rates are now at record lows, but most lenders sneakily only offer their best deals to new customers.
Loyal, existing customers might find themselves stuck on higher rates, shelling out hundreds of dollars a month extra for no good reason.
So before you do anything else, check your last home loan statement. Find the interest rate.
Then visit your lender’s website and see what their lowest rates are.
If new borrowers can get a better rate for the same loan type as yours, call your lender. Seriously, just ask them to match you to their lowest rate.
If you’re lucky, that’s all you’ll have to do to start saving serious mortgage money.
2. Refinance to a new lender
But there’s no need to stick with your current lender at all. Look around and you may see much lower rates elsewhere.
That means it’s time to refinance your mortgage and switch lenders.
Refinancing isn’t all that hard. Look for a better deal with another lender, then apply for the new loan.
You’ll need to jump through the usual application hoops, like providing evidence of your income, spending habits, debts, assets, and proof of your employment.
This should all be simpler now though because you already have a home loan. You’re likely in a stronger financial position, with less debt and more equity, than you were when you started your current home loan.
If you’re not convinced that switching can save you money, here’s a quick example.
Imagine your lender has you stuck on a rate of 2.90% and you switch to a better rate of 1.90%. Here’s how much your repayments would shrink, assuming a 30-year loan term and a loan amount of $700,000:
- Monthly repayments at 2.90% = $2,913
- Monthly repayments at 1.90% = $2,552
Refinancing to a lower rate in this scenario means saving $361 a month. Over a year, that’s $4,332 you’d save.
3. Build up a savings buffer while rates are low
We know that interest rates are lower than they’ve ever been.
But the downside is that rates can only really go up from here. It’s inevitable.
Another step every borrower can take to save money now is to start building up a buffer of savings in their home loan.
This has two benefits: It allows you to pay down the loan faster now while rates are low, and it gives you some room to breathe when rates rise and your monthly repayments get bigger.
The way you build up a savings buffer depends on your home loan.
Most home loans, especially loans with variable interest rates, allow you to make extra repayments.
Building up extra repayments in your home loan reduces the amount of interest you pay and helps you get out of debt faster.
If your loan has an offset account this strategy works even better.
An offset account lets you save money in it like a bank account.
Every dollar saved in the offset account offsets your loan principal, reducing the interest you pay.
And you can spend it later if you need it.
4. Make fortnightly loan repayments
How frequently you repay your loan also affects the ultimate cost of it.
This is because lenders calculate your interest charges daily.
The earlier you repay it, the less total interest you pay.
A simple way to take advantage of this fact is to make fortnightly, rather than monthly, repayments on your loan.
There are 12 months in a year, but there are 26 fortnights. Switching to fortnightly repayments, therefore, gives you an extra month’s repayments each year.
5. Don’t get complacent
Even after you’ve followed the steps above your work isn’t done.
The final step is to avoid getting complacent.
This means regularly repeating step 1 (and possibly step 2). Interest rates are always changing.
Don’t let yourself get stuck on a higher rate again.
While it would be very time-consuming to refinance your loan every few months, it’s certainly worth reevaluating your loan every year to make sure you are still getting a good deal. Over the long life of a home loan, this will save you the most money.
To find out more, or to review your current loans, get in touch with a Centra Money finance specialist for a confidential and obligation-free appointment at 08 8211 7180 or info@centramoney.com.au.
Article courtesy of Michael Yardney’s Property Update.