Best ways to shrink your home loan: interest under 2 per cent

Mortgage sizes are ballooning, but there are now 189 lenders offering home loan rates below 2 per cent. SEE THE LIST

Australia’s housing boom has stretched mortgage sizes dramatically and borrowers are being urged to get theirs in financial shape before interest rates rise again.

The average mortgage size has climbed 11.3 per cent in 12 months to $574,100, according to Australian Bureau of Statistics and CommSec data, ranging between $390,500 in Tasmania and $742,700 in New South Wales.

New lending to owner occupiers has almost doubled in a year, driven by record-low interest rates and government stimulus spending, says financial comparison website Mozo spokesman Tom Godfrey.

“It’s important to remember though that while interest rates are at record lows at the moment, they are likely to increase in the years ahead,” he says.

“So building up a decent balance in an offset account can help you sleep a little easier and put you in a better financial position if interest rates start rising.”

EXTRA REPAYMENTS

Godfrey says borrowers should make extra repayments if they can afford it, compare interest rates to ensure they’re getting the best possible deal, and consider switching to interest-only repayments if they’re under financial stress.

Remember that time shrinks mortgages in both real and relative terms. A large amount you borrowed a decade ago seems smaller today because home values and loan sizes are much larger.

Mozo’s Tom Godfrey says interest rates will eventually increase. Picture: Supplied.

Mortgage broker Rebecca Jarrett-Dalton, founder of Two Red Shoes, says the first two years of a mortgage often feel the hardest.

“Look at your repayments versus the rent you’d have to pay, and right now they probably align pretty well, or it could be cheaper to pay off your loan – wouldn’t you rather this be working for you?” she says.

HAVE SOME FUN

Jarrett-Dalton suggest having some mortgage fun by treating it like paying a game with targets and rewards, perhaps tracking the portion of the property you own so you can celebrate when you’ve paid off the driveway.

“One of my clients really likes round numbers – so after the bank takes a repayment she looks at the balance and pays in extra to make a nice neat number,” she says.

“Pay as much as you can now while rates are low – and you won’t feel the pressure when they start to rise.”

New research by online mortgage broker platform True Savings has calculated Australians are paying $3.6 billion a year more than they need to on home loan interest.

GET A BETTER RATE

True Savings CEO Pete Steel says a home loan is most Australians’ biggest expense “but it also holds the biggest potential savings”.

“By getting a better interest rate, you could save straight away … we are seeing an average saving of over $5000 each year,” he says.

“Getting expert advice is easy and helps Aussie families understand the intricacies of mortgages.”

Max Wagschall, 37, says he and his wife have often put mortgages in the too-hard basket but recently examined their home loan health.

Real estate agent Max Wagschall with daughter Charlotte.

“Checking your home loan a couple of times a year should absolutely become the new norm for most Aussies with a mortgage,” says Mr Wagschall, a real estate agent.

“You want to make sure that you’re getting the best rate, and I know most of the big banks won’t necessarily let you know if you can be on a better rate, because that’s revenue for them,” he says.

Brighter Finance founder and mortgage broker Marcus Roberts says he is seeing people paying down their mortgages with money they would have otherwise used for holidays.

Roberts says people should understand options such as fixed or split loans, and buffer higher future rates when assessing their own ability to repay.

“Borrowers should understand what repayments may look like in years to come,” he says.

AVERAGE MORTGAGE SIZES

For owner-occupier loans

New South Wales $742,700 (up 16.8%)

Victoria $601,200 (up 9.1%)

Queensland $464,100 (up 11%)

South Australia $413,300 (up 13.6%)

Western Australia $442,200 (up 9.2%)

Tasmania $390,500 (up 16.1%)

Northern Territory $401,600 (up 17%)

ACT $544,000 (up 4.1%)

AUSTRALIA $574,100 (up 11.3%)

Source: Australian Bureau of Statistics, CommSec

Rebecca Jarrett-Dalton says try having some fun with repayments. Picture: Dylan Robinson

LOWEST RATES UNDER 2 PER CENT

RateCity says 17 lenders currently offer a variable mortgage interest rate below 2 per cent, while 53 have at least one fixed rate at the same level.

In total, there are 189 home loan products with rates under 2 per cent, and the number has shrunk in recent months as ultra-cheap four and five-year fixed rates disappeared.

Here are the lowest-rate lenders, according to RateCity:

Variable:

Reduce Home Loans 1.77%

Homestar Finance 1.79%

Pacific Mortgage Group 1.79%

Freedom Lend 1.84%

Well Home Loans 1.87%

Fixed:

Greater Bank 1.69%

Homestar Finance 1.79%

Hume Bank 1.79%

P&N Bank 1.79%

RACQ Bank 1.79%

Ubank 1.79%

(* fixed rates are either 12 or 24 months)

Originally published as Best ways to shrink your home loan: interest under 2 per cent