Interest rates have come down more than 0.5 per cent in recent months, giving homeowners an opportunity to get ahead on their mortgages. But if you want to make even more headway to pay off your home loan sooner, follow these tips to save money and step closer towards becoming mortgage-free!
For many homeowners, a mortgage is a “set and forget” proposition. You get a mortgage, you make the repayments each month, end of story — right?
Wrong! Your home loan is likely to be the biggest expense in your budget, so it’s in your best interests (literally and figuratively) to look for ways to pay it off more quickly, says Mortgage Choice spokesperson, Belinda Williamson. These four strategies will help you on your way to do just that.
Ask for a cheaper interest rate
“Don’t be afraid to ask your lender a range of questions,” Williamson says, “and ask them for the best deal on your home loan in terms of interest rate, fees and features.” Laws were introduced a few years ago to make it easier to switch lenders, so banks are keener than ever to retain your business. If they’re not willing to negotiate, shop around! And remember, if you sign onto a professional package, you can save up to 0.8 per cent instantly. If you don’t ask, you won’t get!
Potential saving: If your lender agrees to reduce your interest rate by 0.5 per cent, on a $350,000 mortgage you’ll save $1,750 per year.
Make a lump sum payment
If you’re lucky enough to be on the receiving end of a small lump sum payment, think about contributing at least half of it to your mortgage. If you apply the payment straight to your principal (outstanding loan balance), you’ll reduce the size of your loan and the amount of interest you’re required to pay over the life of your loan. Consider doing this if you finish up a job and get paid out your annual leave, receive an inheritance or get a tax refund back at end of financial year.
Potential saving: A $2,000 lump sum payment on a 6.5 per cent home loan will reduce your mortgage balance and save you $130 per year in reduced interest payments.
Pitch in extra payments
If you can afford it, making extra regular payments is going to help you get ahead with your mortgage. Even small amounts will be beneficial over the long run. For instance, if your weekly mortgage repayment is $462, why not pay $480? It’s unlikely that you’ll miss that extra $18 per week, but over 12 months that reduces your mortgage by almost $1,000. Over 10 years, that’s a $10,000 saving (plus interest!), simply for funnelling your spare change into your mortgage.
Potential saving: $1,000 per year
Use an offset account
According to Williamson, there are certain features of a home loan that can save you money. “If used appropriately, they can save you thousands of dollars and cut time off your loan term,” she says. One such feature is an offset account, which is attached to your home loan and helps you to reduce the interest you need to pay.
For instance, if you have $10,000 in your offset account and your outstanding home loan balance is $250,000, you’ll only be charged interest on $240,000. It’s a great way to reduce the amount of interest you’re charged and best of all, you still have access to your funds if you need to access them at a moment’s notice.
Potential saving: With $10,000 in an offset account, at an average interest rate of 6.5 per cent you’ll save interest of $650 per year.