While the joy of living in your own home is incomparable, it’s not unusual to feel bogged down by the mortgage costs, including the interest you will pay on your home loan. However, there are a few things you can do, like comparing home loan deals online to find a lower rate and getting the right features in your home loan, to save money in interest charges and create some financial breathing space for yourself.
This post brings you some straightforward hacks to reduce the interest on your mortgage.
- Getting an offset account linked to your mortgage
An offset account is a transaction account linked to your mortgage. Any funds in the offset account are used to reduce the balance on which the interest is calculated. Therefore, you will end up paying less interest overtime, and a larger part of your repayment is applied towards the principal amount.
Here’s just one strategy you can use to reduce your loan balance with an offset account. If you use a credit card for your expenses, you can have your salary deposited in your offset account and use it to pay off your credit card bill in full at the end of the month. This will help ensure a high balance in your offset account. But, as always, it’s important to avoid overspending and ensure you are paying your bills in full to benefit from this strategy.
- Making fortnightly payments instead of paying monthly
Does it really matter whether you choose to make your repayments monthly, fortnightly, or weekly? Well, the answer turns out to be yes!
Although a year has 12 months, the number of fortnights in a year isn’t exactly double that. There are 26 fortnights in a year that correspond to 13 months (or 13 monthly repayments in home loan terms). This means if you simply switch to making your repayments every fortnight, you’ll automatically make an extra month’s repayment every year, which will save you money on interest and also help you pay off your home loan sooner.
Here’s an example to understand this better. Imagine taking out a home loan worth $400,000 for 30 years at an interest rate of 3.64% per annum. Your monthly repayments will be approximately $1,828. Now, if you switch from monthly to fortnightly payments, you will pay an additional $1,828 into your mortgage every year. This will cut down nearly five years from your home loan and save you about $38,000 on interest charges.
- Opting for a split rate on your mortgage
Whether you should fix your home loan or go with a variable rate of interest is debatable. A fixed home loan gives you the security of fixed repayments, but a variable rate lets you
benefit from market movements. A variable rate home loan is also more flexible, allowing you to make additional repayments or reduce your balance with an offset account.
But what if you could get the best of both worlds?
A split rate home loan allows you ‘fix’ a part of your home loan while leaving the remainder at a variable rate. Therefore, you can benefit from the stability of the fixed portion and the flexibility of the variable part.
- Refinancing your home loan to a lower interest rate
If you’ve had your mortgage for a few years, this simple hack could potentially save you a lot of money in interest charges.
The mortgage market is quite competitive, and many lenders offer discounts on interest rates and fees to attract new customers.
If you are stuck with an older mortgage with a higher interest rate, this could be the window of opportunity to switch to a lower rate and save yourself a lot of money! You can use this online calculator to work out your monthly savings at a lower rate of interest.
- Working with a mortgage broker to get a better deal
Consulting a mortgage broker can save you a lot of time and effort in selecting the right home loan for your needs. Working with a broker also makes it easier to find an appropriate home loan if your financial situation isn’t the strongest, like when your credit rating is average, or you have a low deposit.
The best part about working with a broker is that you pay nothing for the service in most cases. Brokers are generally paid on commission basis by lenders, but that doesn’t mean they are biased in their opinions. It’s also illegal for mortgage brokers to recommend home loans to their clients that they cannot afford to repay. Brokers are expected to act in your best interests as per the code of their practice.
A good broker will help you find a competitive deal with the features you need to help you manage your mortgage better. In case you’ve been on the same mortgage deal for some time, a broker can also help you negotiate a better rate with your lender or refinance to another lender.
