Pay less interest on your home loan

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 expensive.

“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.

Case study

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 www.australianunitypfs.com.au