How can I reduce the interest on my mortgage?
The size of Australian home loans has been growing for some time, which is why it's so important to think carefully about repaying what you owe sooner rather than later. Reducing the interest on your mortgage can have a wide range of benefits not only will it put you in a more stable financial position, but it'll reflect more positively in your credit score.
Long-term mortgages can seem almost impossible to reduce when you first take them out, but this certainly isn't the case. There are many different strategies to get your interest rate down and potentially even leave you mortgage-free sooner than you anticipated.
If you're seriously considering bringing down your mortgage interest rate in 2016, then here are just some suggestions on how to make it happen.
Know how much you owe
The best place to start is to have a sound knowledge of exactly how much you owe. There's little point in dealing with uncertain figures, so contact your lender and discuss what your current repayment schedule looks like.
Figures from the Australian Financial Group show the average home loan stands at around $444,000. However, this will vary depending on a number of factors, including the type of property you've bought and its location.
Using a mortgage calculator can be worthwhile. All you need to do is input all the necessary facts and figures before it gives an overview of what you can afford. You'll probably need to back this up with some advice from a financial expert, but it's nevertheless a good place to start.
Be aware of the specifics of your mortgage
Every home loan is different, which is why you'll need to find out exactly which regulations apply to the product you've taken out. It's possible there are terms and conditions linked to how much you can overpay by over the lifetime of the mortgage, or that there might be an early repayment charge.
Take a closer look at the small print associated with your mortgage, or get in touch with your lender directly if you're still unsure. This might help dictate how much you're able to reduce your interest rates by.
The Australian Securities and Investments Commission (ASIC) advises that fixed rate home loans might prevent you from making extra repayments without facing a fee.
Change how often you're making payments
Most people decide to pay off their mortgage in monthly instalments, but there might be potential to increase the frequency. This will bring down the interest you are repaying on your mortgage, while lowering the final balance on your home loan.
Westpac figures show paying half of the minimum monthly repayment on a $250,000 at 7 per cent could amount to saving more than $85,000 in interest costs. Not only this, it would shave over six years off the lifetime of your mortgage.
Make regular overpayments
The AFG suggests there's definitely scope for bringing down payments. Repaying an extra $100 a month on a $444,000 mortgage taken out over a 30-year period would reduce the term by 2.7 years.
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.
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. Check the terms and conditions of your specific loan to find out if this is possible.
Switch to a lower interest rate
When the term of your current home loan comes to an end, you might decide to refinance your mortgage. This means looking around for an alternative deal, which could ultimately mean you're repaying less interest in the long term.
There are various different competitive deals around at the moment, so you'll need to do some homework to find which one is the right choice for you. The Reserve Bank of Australia (RBA) lowered the official cash rate to 2 per cent back in May last year, leading many lenders to cut rates on their home loan products.
Remember that as a refinancer, you're in the driving seat. Lenders will be competing for your custom, so now is a good time to take a closer look at what's available and find a more competitive product that still meets your needs.
Find a reason to stay
If switching mortgage provider isn't practical, then don't be afraid to bargain with your existing lender. They might be in a position to match the best deal being offered by a competitor, ASIC suggests, or could waive certain charges if it means keeping you on board.
Compare all the fees and charges associated with your account and see what is out there. It might seem more convenient to stay where you are, but it can be advantageous to take a look around. You should treat your mortgage in the same way as any other financial product, including insurance and credit cards, where you wouldn't necessarily automatically renew without doing some homework.
The next steps
Planning to reduce the size of your mortgage this year could be a wise strategy, but you'll need to be prepared by having all the necessary facts and figures to hand. This is a process you should go through every so often and certainly when your current deal comes to an end to make sure you're still on the most competitive product.
Speaking to an expert is the best place to start, as they'll be able to advise you on what products are available. Get in touch to discuss these in more detail and find a home loan that will put you in a more favourable financial position.