How can I reduce the interest on my mortgage?
Reducing the interest on your mortgage can have a wide range of benefits
Since interest makes up a significant portion of total home loan costs, borrowers are always looking for ways to reduce interest payments. Reducing your mortgage’s interest may seem impossible, but there are a few ways to keep costs down and help you be mortgage-free sooner than expected.
Change how often you’re making payments
Most people decide to pay off their mortgage in monthly instalments, but you may save on interest if you change to more frequent repayments. Paying weekly or fortnightly could bring down the overall interest paid over the life of your loan.
If you switch your payment frequency to fortnightly, for example, this allows you to squeeze in an additional month’s worth of repayment every year. This could not only help you save money but also shave off time on your mortgage so you could own your home sooner.
Check your finances carefully and see if your budget can handle changing payment frequencies. See if the potential savings are worth the slightly increased yearly repayment totals with a fortnightly or weekly frequency compared to a monthly one.
Make additional payments
If you’re not in a position to increase your repayment frequency, you could also make additional lump sum payments. Most lenders will also let you pay off a lump sum from your mortgage. So, if you're fortunate enough to receive an unexpected windfall, you could find it beneficial to use at least some of it to make an overpayment.
Let’s say you’re making monthly repayments on a home loan of $500,000 with an interest rate of 5.79% over a 30-year loan term. If you make an extra lump sum payment of $1,000 per year starting from 5 years of your loan, you could reduce your loan term by 1 month and save $3,210 in interest. The more extra lump sum payments you make, the more you could potentially save.
Even small additional monthly payments could make a difference in the total interest paid. With the same home loan example as above, let’s imagine you’re paying an additional $50 a month for five years. By paying extra, you could reduce your loan term by 10 months and save $17,749 in interest.
To get an estimate of how much additional payments can save you, use an online extra payment calculator. Carrying out these sorts of calculations could help you see just how easy it is to reduce the interest you pay on your mortgage. Sometimes seeing the figures in black and white is all you'll need to focus your attention.
Before you go ahead with your additional repayments, make sure to speak with your lender and check the terms of your home loan. Some lenders may have penalties associated with additional payments.
Switch to a home loan with a lower interest rate
Interest rates are subject to change depending on market factors. If you find that the interest rate on your home loan is significantly higher than the rates being offered by other lenders currently, refinancing your mortgage may be worth considering.
When you refinance a home loan, you’re essentially replacing your current loan with a new one, typically with a new lender as well. Make sure you’re aware of the fees associated with exiting your current loan and entering a new one. These upfront costs could take a toll on your budget if you’re not prepared.
For example, your current home loan has a balance of $300,000 with 15 years left on the loan term. If you’re refinancing from a 6.79% interest rate to a 5.79% variable interest rate, you could save $29,470. Do your own estimates by using our online home refinance calculator. This could give you a better idea of how much you could save on your home loan when you refinance to a lower interest rate.
Find a home loan with an offset sub-account
An offset sub-account is a transaction account linked to your home loan. When you deposit money into the sub-account, it is offset against your mortgage balance. The money in your offset sub-account will be subtracted from the current balance of your mortgage, which in turn lessens the interest you’ll be charged. The more money you put into an offset sub-account, the more you could potentially save on interest.
The percentage that will be offset against your home loan will depend on the kind of offset sub-account the lenders offer. Some may only offer a partial offset sub-account instead of a full one. At loans.com.au, when you take out a Variable Bold Home Loan, you could get a 100% offset sub-account. This means all the money you deposit into the offset sub-account will be reduced from your current home balance.
What can you do to reduce the interest on your mortgage?
Speaking to an expert is the best place to start, as they'll be able to advise you on what products are available. Discuss your plans with a finance expert and get in touch with a lending specialist to discuss your home loan options.
If you want to learn more about how you can reduce interest on your home loan, our friendly lending specialists are happy to help! Call 13 10 90 or arrange a call at your earliest convenience.
Disclaimer: The information provided in this article is general in nature and does not constitute financial or legal advice. Please seek professional advice tailored to your personal circumstances before making any financial decisions.
Other helpful resources:
What you will need to refinance your home loan
How much equity do I need to refinance?
10 frequently asked questions when refinancing
Find out in under 2 minutes if you qualify for one of our home loans.
About the article
As Australia's leading online lender, loans.com.au has been helping people into their dream homes and cars for more than 10 years. Our content is written and reviewed by experienced financial experts. The information we provide is general in nature and does not take into account your personal objectives or needs. If you'd like to chat to one of our lending specialists about a home or car loan, contact us on Live Chat or by calling 13 10 90.
