Ways on how to save big on your mortgage interest
Buying a home is the most costly financial expense they'll ever make, for many Australians. Homeownership brings on financial responsibility — you must devote a portion of your monthly salary to fund the mortgage repayments over the next 30 years or so.
It's essential to remember this principle when borrowing funds to finance your home purchase: the longer you pay for your mortgage cost will be higher. In fact, there are times when you're charged accrued interest that is greater than the home mortgage itself.
Think about it this way: while it's exactly the same as having a longer mortgage period means paying less monthly, you might just have been prolonging your financial burden. What you need to do is look for ways to shave your mortgage term off and save big on interest.
Here are some of the tried and tested ways to help you save some cash and reduce your term for your home loans:
Allow Extra Repayments
You'll be paying for interest payments over the duration of the loan, which usually makes up a majority of the overall amount you're supposed to pay.
One of the easiest ways to cut interest charges is by making additional repayments. You can do this in many ways: You can start boosting your interest payments even by a tiny portion, or you can make lump-sum payments as well.
To illustrate how extra repayments cuts your mortgage term and help you save on interest, consider this: You have a $475,000 home loan with an interest rate of 4.5 percent and a mortgage term of 30 years. You pay $2,406.76 against your home loan on a monthly basis.
However, before you even consider these, you must first ask your lender whether you can make additional repayments and if there are no fees associated with doing so.
There are various computations for additional monthly repayments and lump sum boosts. If you want to explore your options, try our calculator here.
Adjust your payment plan to bi-weekly or weekly
Another easy tweak to get your mortgage finished early and save on interest charges is by changing your repayment terms from monthly to weekly or fortnightly.
The basic idea behind the whole strategy is that if you pay fortnightly or weekly, you get to squeeze in an extra monthly repayment every year. For one year, there are 26 fortnights and 52 weeks — both are equal to 13 months.
If you are allocating $2,000 for monthly repayment, you 'd have spent $24,000 by the end of the year. Allow it $1,000 per fortnight and you'd spend $26,000 a year. The additional $2,000 in reimbursement would do a lot to shorten your mortgage and cut a substantial sum.
Use of an offset account
Wonders can be achieved with an offset account — not only does it act as your savings account, but it can also minimize interest paid on your loan.
If you get a home loan with an offset feature, you'll get your mortgage-linked transaction account. The offset account functions like a normal savings account, allowing you to hold additional funds you have while allowing you to access your money instantly. You can withdraw your funds by phone banking, ATM, or over the counter at any time.
Why does an offset account allow you to save your credit? An offset account works like a high-interest savings account - the amount of money you have in one is accounted for daily
Refinancing better interest rates
If no other options are available, you can refinance your existing mortgage to a better home-loan deal or switch lenders.
Borrowers refinance their home loans, in several cases, with a new lender. But in some cases you can talk to your lender to discuss whether there are options for refinancing.
Why does it work at refinancing? To refinance a mortgage requires to go through the home loan approval process again. However, this time it's a little easier as you've already transacted with a previous lender. This time what you're gunning is a lower interest rate.
A slight change of interest can be very significant. Think about this: If you have a home of $500,000, you will have to pay $2,533 a month for home loans with an interest rate of 4.25% and a 30-year mortgage term. The cumulative interest you'll have accrued over the course of the loan is $412,033.
When you squeeze the interest rate down marginally to 4%, the annual debt will be reduced to $2,387. The difference of $146 sounds low, but if you look at the total interest expense you'll have charged with this new rate, the sum would drop to $359,347, saving you $52,686 substantially.
A 25-base-point reduction in interest rates already significantly reduces your home-loan costs — you can just imagine how much you can save with a 35- or even a 50-base-point cut.
It is therefore important to consider refinancing costs — yes, some fees will be incurred for the process. Note also that the benefits will outweigh the costs when refinancing. A small change in the interest rate might not be able to cover those costs you are going to incur, so it's better to carefully study the situation to make sure you make the smart choice. To know more about the other options, click here.