How to save 12 years off your 30-year home loan

HOME loan customers can cut more than a decade off their home loan and save over $100,000 in interest with this repayment hack.

MORTGAGE customers are being assessed on far higher interest rates than what is advertised to make sure they can cope if rates do climb.

Interest rates on home loans are resting at historically low levels — many below 4 per cent — but lenders use rates more than double this to determine whether its safe to take on a mortgage applicant.

Financial institutions use an “assessment rate” — a buffer added onto an interest rate that is usually between 7 and 8 per cent — to decipher whether a customer could successfully meet their repayments if rates hiked to this level.

Lenders use assessment rates - which are usally between 7 and 8 per cent - to determine if a borrower can meet repayments if interest rates rise.

New analysis by online mortgage broker channel Uno Home Loans found on a $300,000, 30-year loan the average variable rate is 4.5 per cent and monthly repayments are $1534.

But if an assessment rate of 7.25 per cent was applied, a customer would be paying $2047 per month.

MORTGAGES: Australians warned over home loan fears

Uno’s chief financial officer Jason Azzopardi said if customers increased their repayments to reflect this higher rate they could pay off a 30-year $300,000 loan in 17.9 years and save about $112,000 in interest repayments.

Uno Home Loans’ chief financial officer Jason Azzopardi said borrowers should try to pay as much off their home loan as possible while interest rates are low.

“Banks use assessment rates to make sure customers don’t come under stress easily with their loan and they know they can afford a higher rate,’’ he said.

“It’s absolutely the best time to be paying extra, rates are at record lows and people generally have more disposable income, if they can take that off their loan it will reduce their daily interest balance.”

CREDIT CARDS: Interest rates on plastic are falling

Assessment rates do vary between lenders and the borrower’s individual situation.

The financial regulator, the Australian Prudential Regulation Authority, has continued to focus on serviceability standards, which has resulted in many new customers now building up fatter buffers against income losses or higher rates.

This has been part of the strict guidelines around banks’ responsible lending requirements.

The Mortgage and Finance Association of Australia’s chief executive officer Mike Felton said paying any extra now on your loan can make a huge difference to reducing your principal faster.

Mortgage and Finance Association of Australia chief executive officer Mike Felton said redraw facilities are handy if you need to draw money back from your mortgage.

“If you are able to make large repayments you will significantly cut the term of your mortgage and your overall interest bill,’’ he said.

“If you do have a loan with a redraw facility then that money is available if you do require it later on.”

A redraw facility holds the extra payments made on your loan and can be withdrawn back without incurring charges if needed.

[e-mail]

@sophieelsworth