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 leg work in the real estate and finance worlds, however you still need to be savvy when it comes to structuring and managing your mortgage.
With home loan interest rates the lowest we’ve ever seen, and a historically low cash rate of 0.10%, many people become complacent. But to get ahead on your mortgage and pay down your debt as soon as possible, there are a few simple things you can do.
1. Save on interest by paying your mortgage fortnightly
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 an average standard variable rate of 5.12% over 30 years, your monthly repayments would be $1,632.54.
If you switched to fortnightly repayments, however, 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 and 10 months.
2. Make additional repayments
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, if you made additional monthly repayments of $250 on a $300,000 home loan at 5.12% interest over a 30 year term (and started repayments at year 5) you would save $55,571.35 in interest. Plus, you would reduce your term by 5 years 9 months.
3. Ask for better deal on your home loan
Many borrowers don’t realise that interest rates are negotiable and as a result, settle for the rate that they are given. Don’t fall into this trap. If you’re not satisfied with the rate that you’re receiving, consider refinancing with your existing lender or choosing a new home loan from a different provider altogether.
Contact your lender 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.
You can also ask you mortgage broker to frequently review available home loan products on the market and give you an update if a better offer pops up.
4. Leverage an offset account
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. If you’re a graphic designer or a business consultant for example, take on some freelance projects as a side hustle.
Put this surplus cash towards your mortgage in the form of additional repayments and reap the benefits.
The end of financial year (EOFY), is 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
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