4 methods which could reduce your home loan

Canstar previously calculated that Australians are potentially facing additional $1,386 added to their monthly mortgage repayment since last April, and with the final destination of interest rates unknown, it remains to be seen when these increases will cease. 

According to Compare Club, there are existing avenues that could see the average Australian borrower on a $600,000 principal and interest loan with 5.6 per cent interest paid over 25 years reduce their interest repayments by approximately $354 a month.

With an estimated 800,000 Australians coming off low fixed-rate loans over the course of this year, Sophie Matthews, Compare Club mortgage home loans expert, implored people to explore these avenues.

“No matter what stage you’re at with your home loan, 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,” she said. 

Among the methods Australians can employ to reduce the financial burden, Compare Club suggested making fortnightly mortgage repayments as opposed to monthly ones. Increasing the frequency of payment utilises the power of compounding interest in your favour. 

Using the same mortgage size and conditions as previously mentioned, fortnightly repayments reportedly reduce the loan’s length by three years and nine months, saving approximately $90,000 in interest.

Ms Matthews said this method not only helps you pay your principal quicker but also charges less interest overall “because interest is calculated daily but deducted monthly.”

“Everybody’s situation is different, but we speak to home owners 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,” she said. 

Moreover, for good savers who don’t utilise their entire paycheck, establishing an offset account can help save interest. 

An offset account sits alongside your home loan; however, the balance of that account is deducted from your home loan amount when the bank calculates interest. 

Compare Club revealed $10,000 in an offset account could shave approximately $8,500 off interest repayments over the course of a 25-year, $600,000 loan. 

Ms Matthews said the method “is convenient as well as helping you reduce the interest charged on your home loan.” 

She also detailed how, for disciplined spenders, utilising a credit card to pay for your expenses while getting paid into your offset account on the first of each month could see the interest “calculated on your home loan balance minus your salary.”

“You’d need to have a credit card with a good interest-free period, like 55 days, 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,” she said. 

“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.” 

Compare Club’s financial repayment minimising hack involves ensuring any overpayments go towards your principal mortgage, not interest.

“For example, if someone currently paying $3,322 per month on a principal and interest loan of $600,000 over 25 years based on 4.46 per cent interest started making repayments as though their interest was 5.6 per cent,” Ms Matthews said.

“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.”