Top 10 tips to save money on your home loan
I had a lot of mail from last week’s top 20 tips on getting a mortgage. A lot of readers wanted to know how to save money when you already have a home loan. Here are some tips:
Have a plan: you should plan to own your home as fast as possible, and therefore pay as little interest as possible.
Pay attention to the rate: consider a $350,000 loan over 30 years. If you had a 5.3% mortgage and refinanced at 4.94% – maintaining the same repayments – your loan term would drop from 30 years to around 27 years and five months, saving around $60,000 in interest.
Be prepared to refinance: to save on a mortgage, you must be prepared to go to a lender with a lower interest rate than your current one. Your mortgage may be a good deal when you sign-up but five years later it could be expensive by industry comparison.
Understand the loan term: shorter loan terms usually mean you pay less interest and pay the debt faster. Let’s say you a have $350,000 mortgage at 4.94%, and you opt for a 25-year loan rather than a 30-year: you’d pay 19% less in interest, saving you $61,626. Shifting to a 20-year term will save you $120,199.20.
Repayment frequency is key: the higher the frequency of payment, the slower the interest accrues and the faster you pay off the mortgage. If you pay half the monthly repayment amount fortnightly, rather than monthly, or a quarter of the monthly payment weekly, this means you end up paying the equivalent of an extra month’s payment each year. Consider an average mortgage of around $350,000 and a 30 year term at 4.94%. You’d save around four years and eight months off your loan term and over $56,000 in interest, by paying the monthly repayment weekly or fortnightly.
Put windfalls into your home loan: Tax refunds, Medicare rebates and work bonuses should go into the home loan, reducing interest and speeding repayment.
Have the right loan: ensure your mortgage allows you to put in lump sum amounts. Many fixed rate loans don’t allow this. If you’re offered an offset mortgage that lets you put your income directly into the loan, make sure this suits you. It requires discipline.
Do it early: increasing your repayments and putting in lump sums is most effective when you do it early in the term of the loan.
Know your fees: the headline repayment figure in your mortgage agreement is not the only number you should look at. Lenders charge different fees, so be cognisant of any incidentals that may not be captured in the comparison rate.
Beware of interest only: don’t select an interest-only loan if you want to repay it quickly. Always opt for principal + interest.
When borrowers ‘set and forget’ their mortgage, they usually pay too much interest and have the debt longer than they should. Get focused and save yourself a lot of money.
Mark Bouris is executive chairman of Yellow Brick Road, a financial services company offering home loans, financial planning, accounting and tax, and insurance.
You can contact Mark on Twitter.