- With interest rates expected to keep rising, Compare Club has tips to ease the mortgage pain
- Mortgage payers can harness the power of compounding to knock years off a home loan
- Using a credit card cleverly, mortgage payers can cut interest charges significantly
With the reserve Reserve Bank expected to announce its tenth consecutive cash rate hike next week, Compare Club Mortgage Home Loans Expert Sophie Matthews, has four simple tips to help Australians pay off their mortgage sooner.
Ms Matthews said, “With Australian homeowners really feeling the squeeze in 2023 we wanted to highlight some simple ways to save money by being smart with their home loan.
“No matter what stage you’re at with your mortgage, there are tactics you can employ to help your cash flow and make savings. Even if it’s just asking your bank for a better rate, it pays to be proactive,” Ms Matthews said.
More regular payments
Mortgage payers can harness the power of compounding simply and knock three to five years off a home loan simply by making payments fortnightly instead of monthly. Using a $600k mortgage paying principal and interest over 25 years at a rate of 5.6 per cent as an example. Switching to fortnightly repayments reduces the length of the loan by three years and nine months, saving more than $90,000 in interest.
|Total interest charged
|Total loan repayments
Ms Matthews said, “As well as paying down your principal loan faster, you’ll be charged less interest overall because interest is calculated daily but deducted monthly, so you’ll knock more off your principal loan amount.
“Everybody’s situation is different, but we speak to homeowners every day who aren’t aware that even the simple act of switching to fortnightly repayments could cut upwards of $300 a month from their mortgage costs.”
Consider an offset account
Good savers who do not spend their paycheck each week might consider an offset account to help save on interest. On the other hand, those who can afford to save but might not be as disciplined, could consider a home loan with a redraw facility.
An offset account sits alongside a home loan. The balance of that account is deducted from the home loan amount when interest is calculated. This can help lower monthly repayments. $10 thousand in an offset account can shave around $8,500 off interest repayments over the course of a 25-year, $600 thousand loan.
Ms Matthews said, “An offset account works almost exactly like a typical savings account, so the finances are easily accessible and can be transferred or connected to your debit card for easy spending.
“If you’re disciplined in keeping your salary and savings in your account for as long as possible, this is convenient as well as helping you reduce the interest charged on your home loan.
“A redraw makes it a little harder to access your money, and can come with fees or limits, so if you need some help keeping your savings stable while also reducing the amount of interest you’re charged, a redraw facility is better suited to your needs,” Ms Matthews explained.
As an example, with a $600 thousand mortgage paying principal with interest over 25 years at a rate of 4.46 per cent; and no offset or redraw; requires $3,322 in monthly repayments. Having $50 thousand in an offset or redraw account would reduce repayments to $3,045. This would generate thousands of savings over the lifetime of the loan and cut years off the mortgage.
Harness the power of a credit card
Using a credit card cleverly, mortgage payers can cut interest charges significantly.
Mortgage payers might consider having their salary paid into an offset account and rather use a credit card to pay expenses. Since interest is charged daily but deducted monthly, interest will be calculated on your home loan balance minus your salary.
Ms Matthews said, “You’d need to have a credit card with a good interest-free period, like 55 days or something, and here’s the disciplined part. For this to be effective, you need to pay your credit card bill balance off in full at the end of every month, right before your next salary deposit.”
“This trick keeps your offset account at a maximum balance for as long as possible, minimising interest charges on your principal loan amount.”
“This gets your loan paid down quicker, shaving years off the life of your loan,” she explained.
Direct overpayments to principal mortgage, rather than interest
If you checking your home loan statements to ensure that overpayments go towards the principal, you could save money in the long run for not a lot of effort.
Ms Matthews said, “Many banks have home loans on a default system whereby any overpayments go towards interest, so if you ever get a tax refund, a bonus at work or decide to put more payments into your loan, make sure you call your bank ahead of making the deposit to ensure it comes off your principal.”
“For example, if someone currently paying $3,322 per month on a principal and interest loan of $600k over 25 years based on 4.46 per cent interest started making repayments as though their interest was 5.6 per cent.
“Their repayments would be $3,721 per month, contributing an extra $399 per month towards their principal which would save them $79,006 in interest and pay the loan off four years and five months sooner,” Ms Matthews said.
The above is general advice and is not to be taken as financial advice. Homeowners
should seek financial advice to ascertain if these tips would work for them.