How to save money on your home loan in minutes

We don’t have to tell you that the cost of living is hitting hard and that interest rate rises have made homeowners all more than a little uncomfortable. With rates going down to record lows of 0.1%p.a. (RBA cash rate) during 2020 and rising to 4.35%p.a., it left a lot of mortgage holders in a world of financial hurt. However, not everything is doom and gloom.

There are tried and true ways you can save significantly on your home loan – and it doesn’t take a lot of running around, calling loan managers, or filing endless amounts of paperwork (again.)

So how can you save a bundle on your home loan in minutes? We have a raft of options and tips here, some of them taking seconds and others a bit longer. But don’t worry, they won’t take up too much of your time (and as we know, time equals money!)

Review your budget

The first step is to review your budget, especially if you haven’t done so in a while. It’s critical to have a record of all your current spending (this will help you find areas where you might potentially save money) as well as an idea of how much money remains each fortnight or month. Can you redirect it towards your mortgage? Savings? Investments?

Switch to fortnightly payments

This is a minute or two switch that can slash the time on your mortgage and reduce interest. Most mortgages set repayments to be drawn every month. The advantage to paying fortnightly is that you’ll not only halve the monthly amount and spread it over two payments, but you’ll make an “extra” monthly repayment per year, as it equates to 26 payments (26 / 2 = 13) every year instead.

Opt for an offset account

If you don’t have an offset account already, you should ask your loan manager or broker to see if an offset account is available for your mortgage. An offset account does what it says on the tin – the money in your bank account “offsets” the interest charged on your home loan. If you have a $700,000 home loan and $40,000 in deposits, you are only charged interest on the $660,000. If you do not have high amounts of savings ($10,000 or below), it may not be worth taking out an offset account, as they can attract additional fees.

Don’t choose an interest only loan

The majority of house loans include both principal and interest payments. This means that repayments lower the principal (amount borrowed) while covering the interest for the entire term.

With an interest-only loan, you just pay interest on the amount borrowed. These loans are often for a specific time period (for example, five years). The attraction to interest only loans is that your repayments are significantly lower than a principal plus interest mortgage.

This has a downside: you aren’t chipping away at the original principal amount. This implies your debt will not decrease, and you will have to pay extra interest on the back end of the loan instead of upfront. Paying both the principal and the interest all at once is the most effective approach to pay off your mortgage faster. Use Savvy’s interest-only calculator to learn what repayments may look like on different amounts borrowed.

Instant relief, chronic pain: extending your term

One approach to potentially cut your repayments is to extend the length of your loan from, say, 25 years to 30. The disadvantage is that this might wind up costing you significantly more in interest over the life of the loan.

Make higher or extra repayments

Though it may sound counterintuitive, but if you can make higher or additional repayments now you can shorten the length of your loan and reduce interest over time. You may want to put in an extra repayment after getting a bonus at work, a higher-than-expected tax return, or some other windfall. Check before you make higher or extra repayments, as some home loans may penalise you for doing so.

However, this makes more sense when you shop around for different loans, which is known as a mortgage refinance or home loan refinancing.

Finding a home loan at lowest interest rates

Any type of research into refinancing your home loan starts with a repayment calculator. If you find a comparable home loan package to your own, you must ask: what are the costs vs. benefits? How much interest will I save over time? Is there more flexibility with a new home loan, or will I be locked into certain aspects I’m not comfortable with? Will the fees eat up any potential savings?

When you start looking for a loan, you must first establish the sort of loan you require. If your loan is on a fixed rate and you feel that interest rates have hit their peak, you can look for a variable rate home loan instead which may take advantage of any rate decreases. Of course, you’ll have to absorb any rate rises if they occur over the term of your variable rate package. Sticking with variable rates gives you more freedom, and most variable home loans provide 100% offset account options and minimal restrictions on additional repayments.

As the home loan market is extremely competitive, you can approach your current lender or bank to match the terms of a lower interest or lower fee loan before taking your business elsewhere.

However, refinancing within that period may result in a break fee. Though they aren’t super high (five figures in some cases), as the government banned such fees a decade ago, but they still exist in some form.

You can also opt for split rate home loans. Split rates may result in one section having fixed rates and the other having variable rates. Also keep in mind that fixed rate home loans may not have as much leeway in making additional repayments.

Using a mortgage broker

With all things mortgages, it makes sense to get as much help as you can. You should speak to a mortgage broker if you want to find the best mortgage deal instead of doing all the research yourself. It can save you a lot of time and of course, money! Just make sure they’re licenced and have a good reputation before proceeding.