Hack to save over $52,000 and cut years off your mortgage

Aussies are paying a crippling 48 per cent of their wages to home loan repayments – but there’s a way you can make this work better for you.

Off the back of the fastest interest rate tightening cycle in a generation, the average mortgage repayment has increased more in the last couple of years than ever before.

Mortgage repayments are one of the largest costs for households, with recent data showing a whopping 48 per cent of our pay packet is consumed by mortgage debt payments.

Given mortgage repayments are such a large line item in our spending, behind this challenge is a huge opportunity. Being smarter with your mortgage can help to cut one of your biggest expenses, leaving more money for saving, investing, or just spending today.

My top four top tips to save interest and cut years off your mortgage:

Weekly payments

Switching to weekly mortgage payments instead of the standard monthly repayment can save you tens of thousands of dollars and cut years off the time to repay your mortgage.

For example, making a mortgage payment of $1000 weekly instead of $4000 monthly would save you $52,642 in interest costs and cut two years and five months off your mortgage repayment term.

This happens for two reasons. First, you’re making more repayments over the course of a full year, because there are 52 weeks over a year. This means you make total mortgage repayments of $52,000 per annum, as opposed to $48,000 with monthly repayments ($4k*12).

These extra payments effectively chip into the amount you owe on your loan and pay it down faster.

Paying your mortgage weekly instead on monthly could save you $52,000 in interest payments. Picture: iStock

The second factor is slightly more complicated, to do with how interest costs are calculated. Basically the amount of interest you pay in any month is calculated based on how much you owe on each day of the month. When you make your monthly mortgage payment at the end of the month, the balance has been higher throughout the month then reduces when your monthly repayment is made.

When your repayments are made weekly, it means that your loan balance reduces through the month, so your total interest bill is lower.

Both these factors combine together to make a significant impact on how quickly your mortgage reduces, so smaller, regular repayments are seriously worth considering.

Shop your mortgage around

Today the mortgage market is highly competitive, with new banks and lenders constantly competing for business. This means there are often deals on offer that could create serious savings.

Shopping around will likely save you on your mortgage. Picture: iStock

As of today, the average variable mortgage interest rate according to Finder.com.au is 7.24 per cent, but the lowest variable mortgage interest rate on offer is 5.9 per cent. To put this interest rate into perspective, paying an extra 1.34 per cent on the average mortgage size ($624,000 as at December 2023) means paying an extra $8362 each year in interest costs.

There’s a huge opportunity for saving money by staying on top of your mortgage and making sure you’ve got the best deal possible.

Be smart with your debt repayments

If you have tax deductible investment debt, i.e. an investment property and a non tax deductible mortgage on your own home, being smart with how much and which debt you repay will make a big difference to your budget and how quickly you get ahead.

Because the effective after tax interest rate you pay on tax deductible debt is significantly lower than the cost of non-tax deductible debt, if you’re planning to pay down debt you’ll want to make sure you focus on the right debt at the right time. Getting your approach right will save you thousands each year.

Use a mortgage broker

A mortgage broker is someone who helps you set up a mortgage, but they can do so much more.

Once you own property, a good mortgage broker will be able to help make sure you’ve got the best deal on your mortgage. In Australia, there’s a clear bank ‘loyalty tax’ that can be seriously costly. This loyalty tax comes about because the banks are often competing for new business customers, so they offer deals and better pricing to entice people to move their mortgage.

A mortgage broker will be able to make sure you’ve got the best deal. Picture: iStock

But once you’re an existing customer, you don’t get the same love, and as a result typically your mortgage interest rate will become less competitive over time. Basically if you set up a mortgage and then don’t change it for a number of years, you’re probably paying more than you have to.

The statistics show that the difference between the interest rate offered for new customers vs. existing in Australia ranges between 0.5 per cent and 1 per cent. Paying 0.5 per cent – 1 per cent more in interest costs on a $624,000 mortgage means paying between $3120 and $6240 more in interest every single year. If you want to maximise the money you have available for investing and wealth building, you need to keep your mortgage interest rates competitive.

Mortgage broking is a free service that’s paid for by the banks, and for this reason along with the potential for serious savings, in my opinion everyone should have a good broker in their corner.

The wrap

Your mortgage repayments are probably your single biggest expense, which means that being smart with your repayments can have a bigger impact. When you take the time to understand the mortgage rules and how to use them to your advantage, you can get the results you want with less effort and hard work.

Ben Nash is a personal finance and investing expert commentator, financial adviser and founder of Pivot Wealth | Instagram | Facebook | Podcast.

Ben is also the Author of Replace your salary by investing and Get Unstuck, and runs regular free online money education events, you can check out all the details and book your place here

Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.