Five proven strategies to help you save money on your home loan
Home ownership has been the Great Australian Dream for decades. Around 70 percent of Australian households
are made up of people who own their own home.
But today, that dream can feel out of reach. From the 1950s until the 1980s the average house price in most
capital cities was equivalent to three years of average earnings, but today it is equivalent to over seven.
Getting on to the property ladder, and staying there, is a bigger commitment than ever.
But a home loan doesn’t have to be a life sentence, says Chris Naughtin, Head of Mortgage & Finance Broking
with Australian Unity. Here are Chris’ proven strategies that will help you pay off your home loan sooner
and make big savings.
Strategy one: Shop around
There are all sorts of deals available but comparing them isn’t easy. “One loan may have a cheaper interest rate,
but higher fees,” says Chris. “Another may have exit penalties if you pay it off early, or a ‘honeymoon’ rate that
turns into higher fees and charges.”
Finding the right loan at the very start can save you a small fortune in fees and interest repayments. But how
do you fight your way through this maze? Chris says the best way is to have an expert do it for you.
“Home loan consultants, like the experts we have here at Australian Unity, spend every day comparing home loans
and have computer models to help them find the right loan for your individual budget.”
Strategy two: Make extra repayments
Paying extra off your home loan will reduce your interest repayments over the long term as the extra repayments
come straight off the principal. “Even small amounts make a big difference,” says Chris.
Here are some of the ways to pay extra that Chris recommends:
Pay a little extra each month. Even an extra $200 each month will allow you to pay off your loan years earlier
and save you tens of thousands of dollars in interest.
If interest rates and therefore your required monthly repayments fall, try to maintain the old monthly repayment.
Pay fortnightly rather than monthly. This useful little strategy works because there are 26 fortnights in a year
but only 12 months. You effectively pay an extra month’s repayment each year. For example, if your monthly repayments
are $3,000 ($1,500 per fortnight) you’ll pay $36,000 a year if you make monthly payments, but you’ll pay $39,000 if
you pay fortnightly.
If you are a recipient of a one-off financial windfall, such as a work bonus or lottery win, use some or all of
that money to make an extra payment.
Strategy three: Combine an offset account with a credit card
Most home loan providers calculate interest based on your account’s outstanding daily balance. If you can reduce
your daily balance, you can reduce your interest.
One way to do that is to use an offset account. This account sits on top of your home loan account and your home loan
provider treats the money you have in your offset account as being in your home loan account. Therefore the daily balance
of your home loan account is less and the interest they charge you is reduced. Importantly, you can withdraw your money
from the offset account whenever you wish.
According to Chris, to make the most of an offset account you should:
Keep your spare cash in your offset account
Park any one-off windfalls in your offset account before you use them
Have your salary credited to your offset account
Use your credit card to pay for your living expenses and pay it off in full, using the salary you parked in your
offset account, before you are charged interest.
Strategy four: Consolidate your loans
If you have a number of loans it might pay to consolidate them into one loan, usually your mortgage because it has the
cheapest interest rate. In most cases, if you consolidate your loans your monthly repayments will be less.
But, Chris warns, if you have a short term loan, such as a personal loan to be paid off over five years, transferring
it to your mortgage will mean the principal amount will be paid off over the much longer life of your mortgage, resulting
in more interest repayments. The short-term debt will have turned into a long-term debt and that always ends up being more
“To avoid this trap, you need to maintain the higher repayments,” says Chris. “This will ensure you quickly pay off the
principal amount of any short-term loans moved to the consolidated loan and then get ahead on the rest of the loan.”
Strategy five: Find the right combination
A combination of all or some of these strategies will best suit you and your budget. “The best way to find the right
combination is to seek help from a professional mortgage broker,” says Chris.
David and Jenny have combined salaries of $8,500 per month after tax and $5,000 in savings. Their living expenses are
$7,945 per month, including repayments on a new $300,000 home loan over 30 years with an interest rate of 7.0% p.a.
Chris’ advice would be to:
open an offset account and arrange for 80 percent of their combined after-tax salaries ($6,800) to be credited
to their offset account, and
use the remaining $1,700 of their salaries plus a credit card to pay for living expenses, being careful to pay
off the credit card (using money from the offset account) at the end of the month before any interest becomes payable, and
put their $5000 savings in the offset account, and
use their excess salary to pay an extra $555 per month off their home loan.
The end result is that David and Jenny pay off their home loan 13 years sooner and save $220,994 in interest.
Get the right advice
This information is intended as general information only. It does not take into account your objectives, financial
situation or needs. For this reason, before making any major financial decision, it is important to seek professional
financial advice. To find an Australian Unity mortgage broker, please visit