Home loan interest rates: how to destroy your debt in a decade

Paying off a mortgage in 10 years has become tougher as home values and loan sizes soar, but you can still put a huge dent in it.

Anthony KeanePersonal finance writer

@keanemoney

3 min read

April 11, 2022 - 9:34AM

The Australian Business Network

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Interest rate rises are coming sooner than many Australians think, making now an important time to try to cut mortgage debt faster.

The Reserve Bank of Australia signalled at its April board meeting that it could lift its official interest rate in June, and economists expect it to rise from today’s 0.1 per cent to 1 per cent by December.

Canstar group executive of financial services Steve Mickenbecker says the property boom’s impact on house prices and home loan sizes means it’s not viable for most recent borrowers to repay a mortgage in 10 years, but people who started theirs several years ago could do some serious damage to their debt.

“Now is the time when you cannot only get ahead and knock down the interest component, but you can also build a buffer so when rates do go up you have insulated yourself for when it starts getting tougher,” he says.

“In a couple of years rates are likely to be 2 per cent higher than today.”

EARLY ACTION

Mickenbecker suggest borrowers “bring forward” future rate rises by paying more off their loan principal today, or finding a cheaper mortgage provider with a low rate but maintaining repayments at the same level.

He says 47 mortgages on Canstar’s database are still below 2 per cent.

Aleks Nikolic is proactive with her mortgage and also runs personal finance community @brokegirlwealth. Picture: Richard Dobson

People can also drop their debt by pumping surplus savings into a mortgage offset account, and using cash windfalls – such as this year’s looming tax offsets of up to $1500 per person – to lower their loan principal fast.

“All these things compound over time because you are front-ending them … the first few years of a loan your principal payments are quite small,” Mickenbecker says.

But as the debt falls, the interest component shrinks and more money automatically goes off the loan principal, he says.

“You can knock 10 years off it – maybe from 30 to 20 years.”

Digital-first mortgage broker Finspo’s CEO, Angus Gilfillan, says there is still time to make the most of the current low-rate situation.

HAGGLE HARD

“If you haven’t reviewed your home loan recently, or if your property has increased in value, now is the perfect time to reassess your options,” he says.

“Existing home loan customers are paying 0.42 per cent more on average than new customers, meaning you can often get a better deal through a new lender or home loan product.”

Gilfillan says you can put a big dent in mortgage debt by:

• Casting your net wide for a better interest rate, beyond your current lender.

• Seeking professional help from a mortgage broker or adviser who can consider cashback offers, fees and switching costs.

• Making extra lump sum repayments, and keeping existing repayments the same even if you do negotiate a lower rate.

• Sitting savings and emergency funds in an offset account, which reduces your interest because interest is charged on the home loan balance minus your offset balance.

“Making early headway on your home loan can make a huge difference to your interest savings over the life of your loan,” Gilfillan says.

Finspo chief executive officer Angus Gilfillan

“This is because any repayments made on the loan principal mean you’re no longer paying interest on that portion of the loan. So, an extra repayment of $100 in the first year of your loan can have a much bigger impact than an extra $100 at the end of your loan.”

Aleks Nikolic, 27, takes an active interest in her home loan, uses an offset account and is a “big fan of lender disloyalty”.

“We do plan on paying down our home loan faster,” she says.

“By refinancing, I’m now able to save around $24,000 over the life of my loan.

“It is always worth exploring refinancing options with a broker to see if they might suit you and your situation - you could save thousands over the life of your loan, sometimes with just an initial phone call.”