Most Australian home loans span over 30 years and, if you stick to this loan term you’ll have accumulated hundreds of thousands of dollars in interest. This money would be better spent on a holiday or sensibly put towards your retirement funds.
For example, a principal and interest home loan for $400,000 at a variable rate of 4.2% over 30 years accrues $287,479 in interest. These calculations also operate on the assumption that this rate stayed the same. If rates rise, the accumulated interest will be higher than $287,479.
Fear not, just because you took out a 30-year mortgage doesn’t mean you’ll need 30 years to pay it off. Anyone can reduce their loan interest and loan term with these four tips.
Tip 1: Pay Your Mortgage More Frequently
While most home loans require a monthly payment, opting for fortnightly repayments could reduce the amount of interest paid over your loan term.
How is this possible?
If you are making monthly repayments, you’ll only make 12 a year. But, if you’re making fortnightly payments, you’re making 26 payments per year, which equates to 13 monthly repayments. Therefore, you’re making an additional monthly repayment, reducing your mortgage principal and the number of years needed to pay off your loan.
To estimate how you can pay off your mortgage earlier, use a calculator. This strategy will help you understand what each frequency would mean for you long-term and short-term.
Tip 2: Refinance to a Lower Interest Rate
If your home loan rate is higher than others on the market, it’s time to consider refinancing. To make refinancing worthwhile, find a mortgage with no application fees and an interest rate that’s at least 1% lower than your existing rate.
For example, in a $450,000 mortgage with a rate of 5%, you will pay $2,416 each month to service the loan. Over the 30-year-term you will pay $419,652 in interest.
However, if you switch to an interest rate of 3.5%, you’ll be paying $2,021 each month, reducing your overall interest payment to $277,453. Here, refinancing saved $395 per month and $142,199 all up.
Before looking to refinance, you should discuss your options with your existing lender as they may be willing to offer a better rate. Alternatively, you may be able to reduce your current interest rate by tweaking your existing loan and removing features you don’t use such as a redraw facility. These features can add between 0.15% to 0.50% on your interest rate depending on your lender.
Tip 3: Make Extra Repayments
Making extra mortgage repayments helps reduce the principal of your loan faster, meaning you pay less interest and reduce your loan term.
For example, in a 30-year-loan for $400,000 at 3.5% interest, you will pay $246,625 in interest.
However, if you opt to pay an additional $203 a month or about $50 a week, you’ll shave 4 years and 11 months off your loan term and put $45,280 back into your pocket.
To estimate how much you can save in interest, use our ‘extra repayment’ calculator.
Tip 4: Consolidate Your Debt
When you have multiple debts, it can be challenging to keep up with repayments as well as your budget. Rather than trying to balance repayments and risk experiencing financial stress, you might want to consider consolidating your debts.
Debt consolidation allows you to roll all your debts into one loan with one repayment. Plus, it enables you to pay off your debts faster because you can elect to pay more than the minimum if you have money to spare.
Words by Tricia Snell