Comparing home loans to get the best possible interest rate can help you save thousands of dollars over the life of the loan. But did you know getting a lower interest rate is not the only way you can save money on your home loan? You can do several other things to save money on your mortgage when buying a home. Some of these simple yet proven tips include:
1. Making extra repayments
The easiest way to save money on your mortgage is by paying a little extra each month or making one additional repayment yearly. However, your loan provider should permit this, and it’s worth checking the terms and conditions of your loan for any additional fees and charges.
Here’s an example to help you understand how paying extra on your mortgage can save you money. Consider a loan of $600,000 at a rate of 2.5% for 30 years. By paying $200 on top of your minimum monthly repayment each month, you can save more than $35,000 in interest over the term and pay off your loan two years and eight months early. You can use an online calculator to crunch the numbers and find out the amount of money you can save by paying a little extra towards your mortgage regularly.
2. Increasing the frequency of your repayments
A simple way to pay off your mortgage faster is by making fortnightly repayments instead of paying monthly. At the end of the year, you would have made 26 fortnightly or 13 full repayments instead of 12 – automatically getting ahead of your mortgage.
3. Avoiding LMI
Lenders Mortgage Insurance (or LMI) adds thousands to your mortgage but also enables you to purchase a home with a low deposit. LMI is a type of insurance that protects the lender in case you default on your loan. It doesn’t provide you (the borrower) with any protection. The amount of LMI fees you pay depends on the size of your loan, but it can run into thousands of dollars, adding to your upfront costs.
The simplest way to avoid paying for LMI is to save for an adequate deposit. If you can’t, you might want to check whether your parents will guarantee your home loan or if you are eligible for a professional discount.
Professional discounts are usually offered to doctors, accountants, and lawyers who typically earn an incremental income throughout their lives. If you qualify for a professional discount, you might be able to borrow up to 95% of the property’s value without paying for LMI.
4. Saving interest with an offset account
Keeping your savings in a 100% offset account linked to your mortgage can help you reduce the interest you pay on your home.
The funds you keep in your offset account are deducted from the principal, and the interest you pay on your mortgage is calculated on this reduced amount.
Suppose you have $500,000 outstanding on your home loan. You also have $50,000 deposited in your offset account. This means you’ll only pay interest on $450,00. In general, if you can keep a sizeable amount of money in your offset account, you can save thousands of dollars in interest repayments. However, it’s worth checking whether your lender charges you anything for an offset account facility. If yes, it’s advisable to weigh the costs against your potential savings to ensure you don’t end up paying for a feature you don’t use.
5. Refinancing to a lower interest rate
Even though mortgage interest rates have risen after the recent RBA rate hikes, not all lenders have passed on the hike in full to their customers. The average interest rate is presently around 3.23%, but you can still find some lenders charging less than 3% interest to their mortgage customers.
If your interest rate doesn’t start with a 2 in front of it, it could be worth checking the market for better deals and asking your lender to match up if you find a lower rate elsewhere.
If your lender disagrees, you have the option of refinancing your home loan to bring down your monthly repayments and save money in interest. However, there are costs associated with refinancing, and it is essential to determine your break-even point or how long it will take for you to recoup your costs if you refinance your home loan.
It’s also advisable to check your credit score before you refinance. If your credit score is low, you might not qualify for the best deals with lenders. You could speak with a mortgage broker to find out about competitive deals on the market and whether it’s a good idea for you to refinance or not. You can also pose your home loan queries to a Hashching expert for their opinion.