A 30-year mortgage might sound like something you just set and forget, but being proactive can save you loads over the life of your home loan. Here are some simple ways to help ease the pressure on your budget and whittle years off your mortgage.
1. Shop around on interest rates
Refinancing to a different mortgage product or a different lender altogether could get you a better deal and help you make significant savings on your home loan.
Check the fine print before switching to a different lender for a lower interest rate. Consider the repayment options, the remaining term of your loan, features and any fees. Considerable costs can be associated with refinancing, such as application and exit fees that could cost you more over your remaining loan term.
See what your bank can do with your current rate, especially if you’ve got a decent credit rating and a reliable income. Lenders may be willing to offer a lower interest rate in order to get you switch - or to stay!
2. Consider an offset account
An offset account is a transaction account linked to your home loan, where you can park any extra funds you have.
How does it help you save on your home loan? The money deposited into your account ‘offsets’ the remaining balance of your loan, essentially reducing the amount of interest you pay.
Say you have a $600,000 home loan and $50,000 sitting in your off-set account – you’ll only pay interest on $550,000 while still being able to access that cash if you need it.
You can use this strategy to pay off your mortgage faster, especially if you have a decent amount of money sitting in your offset account.
3. Make extra repayments
If you have the ability to switch your repayments to fortnightly, or even weekly, rather than monthly, you’ll be making additional payments over the course of the year – and saving money to boot.
Getting into the habit of putting any extra funds towards your mortgage can help you save on your loan too and help pay it down faster. So if you received a bonus at work or a tax refund, putting it onto your mortgage whittles down the amount you’ve borrowed (known as the principal) and again, means you pay less interest.
Similarly, bumping up your repayments, if you can afford to, can also help you save. Any extra that you pay over the minimum repayments can cut years of the life of the loan.
4. Stick with principal and interest repayments
While interest-only loans can be appealing to investors or a short-term solution to help you out of a tight financial spot, it won’t help you save on your home loan or pay it off faster. Mainly because with this type of loan, you’ll only pay interest on the principal.
So if you borrow $500,000 and opt for an interest-only loan, you’ll pay interest on the $500,000, but the debt itself won’t go down. That means it’ll take you longer to pay your mortgage off completely.
Owner occupiers will generally be better off paying off both the principal and the interest on a home loan – which is what most home loans require you to do.
5. Consider fixing your interest rate
When interest rates were at record lows, mortgage-holders opted for fixed loans in droves, rather than variable. And while interest rates have increased, there may still be competitive deals around.
Fixing could save you money on your repayments or at least provide you with some certainty during your fixed period while interest rates are still changing.
It’s worth doing some legwork to see what kinds of deals are available, and talking to a financial planner to determine what’s right for you and your financial circumstances.