Purchasing a home and taking out finance can be a time-intensive process that requires research, due diligence and patience. So once you’ve secured a home loan you may think that you’ve done your fair share of legwork in the real estate and finance worlds, however you still need to be savvy when it comes to structuring and managing your mortgage.
We’re currently witnessing home loan interest rates that are among the lowest we’ve ever seen, and with a historically low cash rate of 1.75%, many people become complacent. However, to get ahead on your mortgage and to pay down your debt as soon as possible, there’s a few things you can do to get ahead.
1. Opt for fortnightly repayments. Many borrowers make monthly repayments by default, however you should consider switching to fortnightly repayments as this can see more money in your pocket. On a variable home loan of $300,000 at the current average standard variable rate of 5.12% over 30 years, your monthly repayments would be $1,632.54. However, if you switched to fortnightly repayments, your repayments would be just $816.27. By doing this, you would potentially save $53,950.88 in interest over the life of the loan and you would reduce your loan term by 4 years & 10 months.
2. Go the extra mile. Going above and beyond your minimum repayments can make a huge difference when it comes to getting ahead on your mortgage. By making regular additional repayments, you can minimise your interest charges and your loan term. For instance, on a $300,000 home loan at 5.12% interest over a 30 year term, if you made additional monthly repayments of $250 and started repayments at year 5, you would cash in on $55,571.35 in interest saved. Plus, you would reduce your term by 5 years 9 months.
3. Ask for better. Many borrowers don’t realise that interest rates are negotiable and as a result, they often settle for the rate that they are given. Don’t fall into this way of thinking. If you’re not satisfied with the rate that you’re receiving, consider refinancing with your existing lender. Contact them directly and request a lower rate. If you have a strong repayment history and you’ve been a customer for several years, chances are they’ll give you a rate discount. Even a 0.25% rate reduction could mean big savings over the life of your loan.
4. Leverage an offset. An offset account is a transaction account which reduces the interest payable on your home loan by the amount held in your account. For instance, a 100% offset account with $50,000 in it, on a mortgage of $300,000, would see interest-only calculated on a balance of $250,000 instead of $300,000. Assuming the above home loan, if you had $5,000 sitting in a linked offset account and you started offset at year 5, you could save $12,563.41 in interest and you would save 8 months.
5. Get creative. If you want to build up a mortgage buffer, then you need to get creative when it comes to making some extra cash. Consider renting out a spare bedroom in your property or use your skills outside your workplace. For instance, if you’re a graphic designer or a business consultant, take on some freelance projects on the side. Put this surplus cash towards your mortgage in the form of additional repayments and reap the benefits that will come.
As we near the end of financial year (EOFY), it’s a good time to conduct a financial health check. Review your financial position and take steps to reduce your personal debt by cutting back on expenses or rolling several debts into one -- this way you can manage your finances more efficiently.
Bessie Hassan is the Money Expert at finder.com.au