Now is the time to take advantage of lower interest rates on home loans and pay off your mortgage faster, saving you thousands of dollars.
Lower interest rates are drawing the attention of many Australians to their mortgages and creating a great opportunity for people to pay off their home loans much faster.
The Reserve Bank left its official interest rate on hold last week at a record low of 1%, but two rate cuts since June – and economists expect more to come – have made it the perfect time to attack your mortgage.
However, millions of borrowers have no idea what interest rate they’re paying, the latest change to their mortgage rate, or the best ways to get rid of their biggest debt.
Home loan specialists say it can start with small steps.
RULE NUMBER ONE
It’s simple. Just pay extra.
Any money paid back on the loan principal will forever reduce the mortgage’s interest charges, meaning more of the principal is paid back with each future repayment.
Aussie Home Loans executive chairman John Symond said anyone who could pay an extra $50, $80 or $120 fortnightly into their home loan would pay off their mortgage several years earlier.
“It’s just the little things, because they all add up over time,” he said.
“If you’re serious, pay off your loan as soon as possible.”
Free online mortgage repayment calculators can help you work out the numbers. For example, injecting $80 extra every two weeks saves $31,000 in interest and three and a half years on a typical $350,000 mortgage.
KNOW YOUR RATE
The only way to tell if you’re paying too much for your mortgage is to understand what your interest rate is and what the competition is offering.
Mr Symond said lenders often changed tack, sometimes aggressively seeking new business with reduced fees and lower interest rates, but sometimes not.
“They take turns, but how do consumers know?” he said. Seeking help from a mortgage consultant can help clarify what is going on.
“People think in the long run their bank will take care of them,” Mr Symond said. This did not turn out to be true, with the best interest rates often going to new customers.
uno Home Loans CEO Anthony Justice said it’s essential to check the interest rate you’re paying.
“Our research shows that more than half of consumers don’t know what rate they are on,” he said.
“Ask your lender for a better deal – or have your broker do it for you. If they don’t give you a better deal, find out what the better alternative is and consider switching.
NO FAITHFUL SPENDING
Mr Justice said the recent UN Household Financial Waste report found that Australian households were wasting $1.8 billion a year on gym memberships alone.
Other waste discovered included $930 million in unused and unreturned clothing purchases, $621 million in unnecessary credit card interest and $332 million in unused gift cards.
The biggest contributor to household financial waste was unused food, at $9.1 billion, according to the UN report.
“Be aware of what you could be wasting in your household budget that you could use for mortgage payments,” Justice said.
Cutting out coffee to go and bringing lunch from home instead of buying it are often considered the easiest expense cuts. Canstar’s financial services group manager, Steve Mickenbecker, said that was because both expenses were wasted money with no lasting impact.
“Once you put them down your throat, you don’t feel much better,” he said. “These little indulgences make no difference after the event.”
It was different from spending money on enjoyable experiences like going out to dinner or playing soccer. “People also have to live,” Mr Mickenbecker said.
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AVOID MONTHLY REPAYMENTS
Borrowers are often told to make their payments fortnightly rather than monthly if they want to save money, but this creates some confusion.
The strategy only works if you split a monthly repayment in half and pay it fortnightly, taking advantage of the fact that there are two fortnights and a little each month.
“It’s that extra repayment (every fortnight) every year that makes the difference,” Mickenbecker said.
A new study by Canstar has found that switching from monthly to semi-monthly or weekly payments on a $300,000 mortgage could save a borrower $35,000 and erase more than four years and three months of the term of his home loan.
Canstar found that almost two in five borrowers (38%) still pay their mortgage monthly.
“Your bank normally asks for monthly mortgage payments,” Mickenbecker said.
OFFSET AND REDRAW
Mr Mickenbecker recommended putting all excess money into a clearing account, where the savings are used to reduce the principal of the loan until it is spent.
“You can also put the excess directly into a loan account that has a withdrawal feature,” he said.
Mr Symond said ‘everyone saves for something’, and whether it’s a holiday, a new car or another goal, the money should stay in a home loan account with ease of withdrawal.
“Why put it in a savings account and get 1% interest when you can get 3-4% interest savings on your home loan?” he said.
If you are using an offset account, make sure it is 100%, as some may be 60% or less.
HOME CREDIT BALANCE SHEET
“It’s important to have financial health checks at least once a year,” Symond said.
He said refinancing with another lender at a cheaper rate could save money, and it was important to seek expert advice because a saving of 0, 25% might mean nothing if other costs were involved.
Mr Mickenbecker, said about a quarter of home loans in the market today were priced below 3.5%.
“But there’s a good chance that with your existing home loan, you’ll be paying 0.7% more than that,” he said. “That means taking out a low-interest mortgage will save you a lot of money.
“Then continue to pay your mortgage as if you were still at the highest rate. A difference of 0.7% is a huge difference. You’ll end up not noticing it because you’re not paying more, and you’ll end up taking years off your home loan.