These are five ways to squeeze down your home loan debt and reduce your interest rate bill
STRONG predictions interest rates will fall on Tuesday makes now the perfect time to look at ways to squeeze down your home loan debt even further.
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THERE is a strong chance that interest rates will fall again on Tuesday but even if the Reserve Bank leave the offical rate on hold there are many ways to cut your home loan debt.
The cash rate has a better than 50/50 chance of falling to a historic low of 1.5 per cent, according to economists, which could deliver even cheaper interest rate deals and experts say make the most of it by reducing home loan debt as quickly as possible. Here’s five ways to do it.
1. CHOOSE THE RIGHT LOAN
Many customers focus too much on the interest rate and fail to examine the fees and charges associated with the mortgage, loans.com.au’s managing director Marie Mortimer says.
“The most important thing is the comparison rate on a loan — a lot of home loans might look cheap but they have high application fees or a honeymoon rate where they might switch to a more expensive rate,’’ she says.
The comparison rate factors in all the fees and charges associated with a loan and is a truer cost of what you will really pay.
2. TIP EXTRA IN
When you first sign up to a mortgage it will feel like you’re not making any headway into it but, if you do the maths, paying more early on will help you save.
Start by cutting back on those coffees, unnecessary lunches and takeaway meals and tip an extra $50 a week into your loan.
Calculations from financial comparison website Mozo found, on a $300,000 30-year loan with a rate of 4.52 per cent, this will save you more than $62,000 in interest repayments and shave six years and eight months off your loan’s duration.
3. HIGH FREQUENCY
Often the lender will put you onto monthly repayments but this is simple to change, all it requires is a phone call to your bank.
Moving to fortnightly repayments will leave a stash of cash in your pocket rather than your lender’s, Mozo spokeswoman Kirsty Lamont says.
“Halving your monthly repayment and paying it fortnightly is a neat trick that can save the average borrower $44,422 in interest over the life of the loan,’’ she says.
There are 26 fortnights in a year which means you will be make the equivalent of an extra month’s repayments than when you make 12 monthly repayments.
4. OFFSET/REDRAW
Offset accounts — a daily transaction account linked to a home loan — are a great way to reduce your overall interest bill and many loans.com.au customers opt to do this, Mortimer says.
“You can get your wage and any rent (from investment properties) paid into this account and it offsets the interest repayments and you are paying down more principal,’’ she says.
She says either way people like putting all their savings in an offset or redraw account to reduce the interest costs.
On a $300,000 loan if you have $10,000 in an offset account you will only pay interest on $290,000.
FIX YOUR LOAN
For a $300,000 30-year home loan the lowest variable rate is 3.59 per cent compared to the lowest three-year fixed rate at 3.67 per cent.
While there’s not a huge difference between the two, Lamont says with more rate cuts likely “there’s a good chance many lenders won’t pass all of that on.”
She says “fixed rates are about as low as they are going to get” so fixing or all part of your now is a good idea.
Originally published as These are five ways to squeeze down your home loan debt and reduce your interest rate bill
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