A 25 or 30-year mortgage term is a long time to be paying interest to a lender and in the end you’ll end up paying back a lot more than you originally borrowed. The good news is that there are several positive actions you can take that will reduce your overall bill significantly.
Say you paid off a loan of $1 million over 30 years at today’s variable rates, which average around 6%, you’d end up paying the bank back $2.16 million. Yep, that’s more than double your initial loan amount.
You could save more than $100,000 in that time, just by knocking 0.5% off your repayment rate. This is just one way to make sure you’re paying as little of your money to the bank as possible.
Here are some tips and tricks that can help you.
Pay more to pay less
It may seem counterintuitive at first, but making extra repayments on your loan is one of the most effective ways to save yourself more money, and potentially years, over the life of your loan.
Making even modest extra payments when you’re able will reduce the principal further and therefore the interest you are charged on it.
What’s your frequency?
Many borrowers make their home loan repayments monthly, but you don’t have to. Changing up the frequency so you can pay fortnightly, or even weekly, can result in you making an extra month’s worth of payments each year, without seeming overly burdensome at the time.
An extra month paid each year will make a large difference, but you need to make sure the fortnightly repayments you make are half the total of the monthly repayments you were making. Some lenders will automatically calculate it differently so that you are paying the same amount each year as if you were still paying monthly.
You will find that paying more frequently also means your balance is lower for longer, so will attract less interest.
Lenders generally offer their best deals to new customers or those threatening to leave. If you have been plodding along making your repayments for longer than a year or two, you can rest assured there will be better deals out there.
Be aware of the best interest rates on the market and make sure you are ready to refinance if needed, or at least tell your current lender you will jump ship if they don’t give you their best rate.
The longer you are paying off your home, you may find the more equity you have earned, which can improve your loan to value ratio (LVR) and put you in a better bargaining position to access better rates from multiple lenders.
Get set to offset
Savvy borrowers will often link an offset account to their home loan. This means that any money you accumulate in savings can be used to reduce the amount of the loan you are charged interest on, while you are still able to access the money if you need it.
For example, if you owe $500,000 on your loan, but have saved $50,000 in your offset, you are paying interest on $450,000, but are still free to spend the $50,000.
You may also experience a sudden windfall, such as an inheritance, or an unexpectedly large tax return. Putting this into your home loan or offset will make it worth even more once compound interest is considered.
Get the right help
Navigating the mortgage world alone can be complex and difficult, so a good broker can make sure you access the deals that will save you the most money over time and provide the best features for your circumstances. A broker may even know about government grants or other stimulus that you might be eligible for, which would also save you money and time on your loan.
Zinger Finance has a team of strategists that are experts in long term goals and can help you with information and education on how it all works.