Interest rates going up again: how to slash home loan repayments

Another interest rate rise is likely on February 7, but Australians can cut their mortgage costs with some simple strategies.

The Reserve Bank of Australia looks set to dish out its ninth straight interest rate rise on Tuesday, lifting total monthly repayment costs on a typical $500,000 mortgage by $969 since May 2022.

Borrowers had one month’s respite in January – the RBA board takes holidays too – but the pain since May will flare up again, with some economists forecasting up to four more rate rises this year.

Saving money on your mortgage should be a top priority, and while borrowers are unlikely to recover the entire $11,600 annual extra cost of rate rises for every $500,000 owed, smart strategies can help. Consider these five.

1. CHASE A BETTER RATE

This strategy alone can deliver an annual saving of more than $6000.

Research group Canstar says the difference in repayments between the average variable interest rate of 5.7 per cent and the lowest rate on the market, 3.99 per cent, is $518 a month for a $500,000 mortgage. Switching from average to best would also save $186,411 in the interest over a life of the 30-year loan.

People can refinance with their own bank or find a new lender, as competition is fierce for customers who plenty of equity in their homes.

Interest rate rises have made it urgent for many to seek ways to save money. Picture: iStock

2. CONSOLIDATE DEBTS

While paying around 5 per cent for your mortgage seems tough after years of 2 per cent interest rates, the cost is tiny compared with the rates many people pay on their credit cards – around 20 per cent.

A $10,000 credit card balance is often costing $2000 a year to service, without repaying any of the outstanding debt.

Many consumers have multiple credit cards and personal loans, and consolidating these into a low-rate loan such as a mortgage can cut total interest costs by hundreds of dollars a month.

3. EXTRA REPAYMENTS

This strategy requires more effort because you have to find the extra cash to pump into the home loan.

Trawling through bank and credit card statements may uncover recurring expenses that have been forgotten, while there are many tips online for those seeking money-saving advice.

Canstar says if you can pay an extra $500 a month off a typical mortgage, the total interest bill could be cut by almost $185,000 and the loan repaid about nine years earlier.

4. PAY MORE FREQUENTLY

Repayments on a $500,000 home loan are $2902 a month, which when divided into four comes to $726 a week, Canstar says.

“If you set up a direct debit for this amount each week and make 52 repayments it’s a way of paying an extra $2928 per year off your loan, which can cut your interest bill over the life of the loan by over $117,000, it says. And the loan gets repaid four years and seven months sooner.

5. SWITCH TO INTEREST-ONLY

This is a last resort for borrowers desperate to cut their repayments.

The typical $2902 monthly home loan repayment is based on principal and interest repayments, but if you temporarily switch to interest-only, the repayment drops to $2375 – saving you $527 a month.

Remember that with interest-only loans, none of the outstanding debt gets repaid.

Originally published as Interest rates going up again: how to slash home loan repayments