Buying a home requires the biggest financial commitment most people will ever make during their lifetime. Of course, the loan repayment can be quite challenging at this time. The good news is there are tips to save money on your home loan. Even little changes you make will reduce your interest and have a significant impact in the long term. Imagine how much you could end up saving on your mortgage.
Tips to save money on your home loan
1. Keep your interest rate low
There are two components to your home loan: the principle and the interest. The principal is the loan amount you’ve borrowed and the interest is what your lender charges on your loan amount. When it comes to home loan repayment, the majority payment method is P&I (principal plus interest), which means the less the interest, the less the repayment. For example, if you borrow $400,000 for 30 years with an interest rate of 4%, the monthly repayment will be $1,909.66 (using the calculator from Credit Hub Website), however, the monthly repayment will drop to $1,686.42 if the interest rate decreased to 3% (with other variables the same). There’s a clear difference of $223.24 a month or $2,678.88 a year. To know more about lender interest rates, check regularly the different lenders or simply speak with your broker.
2. Make weekly or fortnightly repayments instead of monthly repayments
There is an effortless way to save on your home loan by Simply switching your loan repayment to weekly or fortnightly. As a matter of fact, interest is calculated on top of the loan principle on a daily basis. However, when you make more frequent repayments, the balance that the lender calculates your interest on every day will be lower, which means you will pay less and less interest gradually.
3. Make extra repayments
As repayments are made frequently, the interest charged on the remaining loan will decrease because your principal amount has been paid off gradually. That’s why even if you make a small extra repayment to your loan every cycle, the savings can be huge.
4. Use a mortgage offset account
Offset accounts are a type of savings or transaction account that is connected to an eligible home or investment loan. Mortgage offset accounts can be linked either to a fixed or variable rate loan. Having an offset account against your mortgage is a plus factor since it aids in reducing the entire interest on the home loan, thus paying off your mortgage faster.
Offset accounts work by deducting the money in your savings account against the balance of your home loan. For example, your home loan is left with a balanced amount of $180,000 and you have savings worth $20,000. Now, if you choose to have 100% of the savings amount offset, then the entire $20,000 is deducted from the mortgage amount, thus leaving with a home loan balance of $160,000.
On the contrary, you can also choose to have a partial offset account like 30%. If the second case applies then your interest will be payable on a loan amount of $174,000 after deducting the $6000 from the offset account.
5. Split your loan between fixed and variable
If you’re worried about the fluctuating interest rates during the whole loan term, it will be a great idea to fix a portion of the loan for an agreed term while keeping the rest variable for extra flexibility.
With the fixed-rate loan, you have the same repayments for the entirety of the fixed term, which is good for budgeting.
6. Review your home loan regularly
This is especially important when it comes to financial position changes or loan market changes, you may find a better rate with a different lender or a better loan product with the same lender. Switching loans is sometimes necessary and also hassle-free, especially if you have a broker to help you with the process.
Whether you are a spender or a saver, there’re always some tips for you to save on your home loan. It never hurts to be mortgage-savvy and save yourselves hundreds of dollars for the future.
Refer to our previous blog: saving money using Mortgage Offset Accounts for more details about the offset accounts