From refinancing to an offset account: 7 tips to save on your mortgage

With record low interest rates and a competitive marketplace, these simple money moves could save you big bucks on your home loan.

Thanks to a record low cash rate, reduced interest rates and a competitive marketplace, now might be the time to review your home loan.

Instead of a ‘set and forget’ mentality, mortgage holders should stay aware of their interest rate and how it compares in market. Shopping around could save you big bucks during the life of your mortgage.

Whether that’s switching to a lower interest rate, changing your repayment schedule or using an offset account, these simple steps could lower your household expenditure, pay off your mortgage quicker or allow you to borrow extra funds to renovate your home.

So if you want to get a kick start on any 2021 money resolutions, consider these seven steps to reduce your home loan costs.

Now is the time to comb through your finances to ensure you’re getting the best deal possible on your home loan. Picture: iStock.

1. CONSIDER REFINANCING

The home loan market is extremely competitive at the moment, so it can pay to shop around if you’re unsatisfied with the interest rate you’re paying. Refinancing your home loan to change your repayment amount, consolidating several loans, or even borrowing more if you have built up equity are a few options to consider. Some lenders also have introductory offers like a reduced rate or cashback incentives that can increase your savings in the short term. But be sure to do the maths to make sure it’s a good deal in the long term.

To see how much you could benefit by switching to a lower rate, try Westpac’s refinancing calculator. The whole process can take under a minute and could show you where you might be able to save thousands.

2. FIX YOUR RATE

For those who like an added layer of stability, a fixed home loan rate means you have a locked-in interest rate that won’t change during a set term of your loan. In Australia this normally ranges from one to five years.

There are, however, pros and cons. Fixing your rate will also mean less flexibility and you won’t be able to capitalise on lowered interest rates if the market changes. However, unlike a variable interest rate, a fixed rate will protect you against rate rises and you may find it easier to budget knowing you have a set repayment amount.

A fixed rate home loan may also come with break cost fees if you choose to exit the loan early, or want to make extra repayments or change your repayment amount, so make sure you’re across those terms before committing.

From fixing your rate, changing your payment schedule or switching banks, there are a number of options you can take to make your mortgage work for you. Picture: iStock.

3. KNOW THE DIFFERENCE BETWEEN ‘PRINCIPLE AND INTEREST’ AND ‘INTEREST ONLY’

The financial terms associated with adapting your mortgage can seem overwhelming, but it’s worth educating yourself on these two terms.

The main purpose of an interest-only loan is that the repayments are less, which can help borrowers prioritise other expenses and debts for a predetermined period of time. However, choosing an interest-only loan also means your principal loan amount will not reduce as you’re merely paying off the interest that goes into maintaining your home loan.

In comparison, ‘principal and interest’ means you’re paying off the interest and the principal loan amount of your mortgage, so you eventually pay off your home loan and own the property.

4. SWITCH YOUR REPAYMENT FREQUENCY

Monthly repayments may be the default for many mortgages but switching to a fortnightly structure could save you thousands during the period of your loan. This is because while you may only make 12 monthly repayments in a year, this is the equivalent of 26 fortnightly repayments, which adds up to a month’s worth of extra repayments annually.

For example, if your annual monthly repayments are 12 lots of $1500, this adds to a total of $18,000 a year. However on a fortnightly structure, that looks like 26 lots of $750, or $19,500 a year. By ‘tricking’ yourself into making the extra repayments, you can pay off your loan quicker and accumulate less interest during the life of your mortgage too.

5. CREATE AN OFFSET ACCOUNT

Some mortgage plans allow you to create an offset account, which is an everyday bank account linked to your home loan, designed to reduce the amount of interest you pay. You can make deposits and withdrawals as normal, but the funds in the account are “offset” against the balance of your home loan. This means you’re only paying interest on a decreased loan amount, which will help you save more. The more money you have in your offset, the bigger the savings.

Just some simple changes could see you save big on your home loan in the future. Picture: iStock.

6. CONSOLIDATE YOUR DEBTS

If you’re juggling high-interest debts (like a car loan, personal loan or credit card), consolidating other debts into your home loan can be a smart move in the long run. Not only could you save money on interest charges – as home loan rates are normally lower than personal loan or credit card rates – this also simplifies your debts into one repayment.

Just keep in mind that doing this may mean you need to increase the repayment rate of your mortgage to accommodate your larger debt. Or you may need to extend your loan term which will increase the amount of interest you’re charged.

7. INCREASE YOUR REPAYMENTS

If you’re in the situation where you can manage your budget to reduce your expenses, increasing your repayments above the minimum repayment will help reduce the length of your loan and the overall interest you pay during your loan’s lifetime. Depending on your loan terms, you might also be able to direct any lump sum payments, like a bonus, tax return or inheritance towards it, which will have a similar effect.

This article was created in partnership with Westpac

Originally published as From refinancing to an offset account: 7 tips to save on your mortgage