“The Great Australian Dream” believes in Australia that homeownership can lead to a better life and is an expression of success and security. It means that every Australian aspires to own their own home at some stage. To live this dream, almost everyone has to rely on taking a home loan. The loan amount, home loan interest rate, and loan tenure play a prominent role in deciding the monthly instalments for your home loan.
Without proper planning and execution, meeting your home loan repayments may become strenuous. And you will end up paying more than what you ought to have against your loan.
Four ways to decrease home loan interest payments
Deciding an Apt Loan Term
The banks offer a vast range of options for the term of the loan.
From 5 years to 30 years, you may decide any figure to be your loan term. You need to pay the principal amount throughout the loan. It means the higher the loan term, the lower the monthly instalment of the principal amount to be repaid.
The higher loan term will also result in more interest paid to the bank on the borrowed money. Take an example of a loan size of $500,000 at a variable interest rate of 3.0%.
For a 30-year loan, your monthly instalment comes out to be $2,108.02. Assuming the interest rate to be constant over the life of the loan, you will end up paying $758,887 back to the bank against the original borrowing of $500,000. It means the interest of $258,887 is paid to the bank.
If the loan term is 25 years, your monthly instalment will increase to $2,371.06, making the total amount paid to the bank $711,317, resulting in the bank’s cumulative interest payments being reduced by $211,317.
It is evident that by reducing your loan term by five years, you save $47,570. Now the critical question here is whether to go for a 30-year loan or a lesser loan term. A lesser loan term will save you approximately $48,000 in interest paid to the bank, but your minimum repayments are higher.
The main characteristic of a variable rate loan is that you can pay an extra amount to what the bank has determined for you. It means that even if the bank has determined $2,108.02 as a monthly repayment for you, you can pay a higher amount than you can afford in the loan. Even if you have taken a 30-year loan term with a $2,108.02 repayment per month, you can still pay $2,371.06 per month, achieving the outcome of a 25-year loan.
In the above example- writing a 30-year loan term can give you more flexibility with your cash flow. Viz. In a month where an unexpected expense hits you, you can pay the minimum stipulated amount. And in the months where you have a higher cash flow, you can dedicate a more elevated amount to the loan.
The bank allows you to make the repayment on a Monthly / Fortnightly or weekly basis. What frequency you make your repayments will determine how soon you can pay off your home loan interest and ultimately save you many thousand dollars in interest paid to the bank.
To understand how the frequency of your repayments will help you save interest. You should glance at how the interest you can calculate on the home loan. One thing is clear that a home loan is borrowed funds, and we must pay interest on it. With the Simple Interest formula, you can calculate the interest.
At the end of the month, you need to make monthly repayment on your home loan. It means your loan account accrues interest for the entire month, and you make your payment at the end. Part of the repayment goes towards interest payment, and the remaining portion reduces the principal amount (called amortization). You will be surprised to read that making minor adjustments to your repayment can result in any savings in interest.
You are sticking to the same example of a $500,000 home loan on a 30-year loan term if you start making the repayment of $1,054.01 per Fortnight instead of the standard $2108.02 per month.
Amazingly you will save around $32,923 in interest paid to the bank over the life of the loan. Not only this, by committing to Fortnightly payments, you will end up spending your home loan in 26 years, six months (approximately). In simpler words, you will finish your home loan three and a half years sooner. At a 5% interest rate, you will be able to pay your loan about five years earlier.
Another way to reduce the interest paid to the bank on your mortgage is the effective use of the redraw facility available to you on your loan account.
In the case of a variable rate home loan, you have the option of parking your surplus savings in your loan account instead of letting the savings sit in the transaction account (earning you no interest) or in the saver account (earning you some interest).
The point to note is that if you keep your savings in the saver account, the bank will pay you interest on your savings. Usually, this interest is way lower than the interest they charge you on your mortgage. There is a disadvantage to having your savings in the saver account. The Taxation department will tax every dollar you earn in the form of interest.
Don’t you think it is better than having your savings in the loan account? As already explained earlier that the bank charges interest on your mortgage on the daily outstanding balance. This means if you have put additional funds in the loan account in addition to the minimum committed repayment.
The extra money sits in the loan account as a surplus amount that you can draw out when you require it. You can call this facility a Redraw Facility. It saves you interest as the bank will charge the interest on the lower loan balance.
At a 3% interest rate, if you put an additional $50,000 in the loan account as a redraw, you will start saving $4.10 per day in interest paid to the bank.
It will have a cascading effect in your favour as you still keep paying the same monthly instalment; hence this saved interest will get added to the principal amount you pay to the bank. And then, you don’t pay any future interest on this to the bank.
Home Loan Health Check
Revisiting your home loans every couple of years is also an important tool. You can get assurance that you are not paying a higher interest rate on your mortgage than you ought to.
It is common among lending institutes to attract new home loan customers by offering them special discounts and lower interest rates. Often, this results in the existing home loan customers paying a higher interest rate to the new home loan customers.
Yes, you thought right, unfortunately, no loyalty discounts with the lenders. One way to ensure you are not paying a higher rate is by frequently having your interest rate reviewed by the lender. At times, the lenders oblige and reluctantly reduce your home loan interest rate. At other times it may be beneficial to switch lenders.
There are a few essential things that you should keep deciding the best course of action. At Apt Mortgages, we can help you understand the best course of action for you. We will do a detailed analysis of the various lenders in the market and their offerings based on your current financial circumstances.
Apt Mortgages: The best solution for Home Loan services
At Apt Mortgages, you will find a simplified and straightforward solution for your Home Loan requirements. We offer a customised tailor-fit platform for all your financial needs. We can assist you with all of these through our channel.
- Home loans
- Business loans
- Property investment loans
- Construction loans.