Rock bottom interest rates mean that home loan repayments have never been so low. But are we spending less on our housing? Quite the contrary.
House prices have surged dramatically over the past year. Accordingly to property analysts CoreLogic, the national median house price increased by a whopping 18.1% from August 2020 to August 2021. Accordingly, we’re borrowing more. The average new home loan in July 2021 was $571,992, as compared to $496,980 one year earlier.
The RBA has repeatedly assured Australians that rates will stay this low for at least the next 2-3 years. Smart borrowers should use this time to get ahead on their mortgage and reduce the overall loan as much as possible before rates rise.
Debbie Ettridge, Head of Home and Commercial Finance for Elders, says that a little bit of discipline now can pay dividends later. “On a typical 25 year principal-and-interest mortgage, most of your payments during the first five to eight years go towards paying off interest. So anything extra you put in during that time will reduce the amount of interest you pay and shorten the life of your loan. It will also give you a buffer if rates rise in the future.”
Here are five ways to pay down your mortgage faster:
1. Look into refinancing
If you’ve had your loan for at least 18 months, it might be time to consider refinancing.
As at September 2021, some lenders are offering variable loan rates for owner-occupier principal & interest loans starting from 1.99%, with fixed rates even lower at 1.69%. If your home loan rate is in the high 2s, or even starts with a 3, you can save some serious cash by switching.
Ask your Elders finance broker to help you negotiate with your current lender for a better rate or place you with another lender with a lower rate and features to suit your current needs.
2. Move to fortnightly repayments
If you’re paying your mortgage monthly, call your bank and ask to be shifted to fortnightly repayments. Why? Two reasons.
Firstly, your mortgage amount is calculated as either 12 annual payments (if monthly) or 24 annual payments (if fortnightly). However, there are 26 fortnights in a year, not 24. You’ll end up making two extra repayments per year, which reduces your principal.
Secondly, home loan interest is calculated daily. By paying fortnightly, you reduce the principal more frequently, meaning you pay less interest overall.
3. Send windfalls to your loan balance
Have you received an EOFY bonus? A tax refund from the ATO? Or another windfall? It requires a little discipline, but if you can send those increases straight to your mortgage you can make a significant dent. Unless you’ve been living outside your means, you don’t need that extra money now. Take a deep breath and transfer it straight to the loan.
4. Make extra repayments
The same principle applies when you get a pay rise. Increase your regular repayments by the same amount as the pay rise and pretend it never happened.
“You can use the same strategy when interest rates drop,” Debbie says. “Keep paying the higher repayment amount, and the difference will come straight off your principal and get it down faster.”
Just be aware that not all loans are flexible, so talk to your Elders finance broker first to check that yours will allow extra repayments.
5. Get an off set account
An offset account is one of the most painless ways possible to reduce your loan. Here’s how they work.
Offset accounts are transaction savings accounts that are linked to your home loan. The money you keep in your offset is counted towards the principal on your home loan for the purpose of calculating interest. If you owe $300,000 on your home loan, but you have $20,000 in your transaction account, you will only be charged interest on $280,000.
This reduces the amount of interest you are charged overall.
To really turbocharge this strategy, add a credit card into the mix and follow these steps:
1. Have your salary paid into the offset account.
2. Put all your expenses on the credit card, so that your salary stays in the offset account for longer and offsets more interest.
3. Set a direct debit so that the credit card balance is paid off every month before interest is charged.
However, it’s not for everyone.
“An offset account often comes as part of a package with an associated fee,” explains Debbie. “If you generally have less than $10,000 in your offset account, it might not be worth paying the extra for this facility.”
Every home loan is different, and it can be hard to work out what features suit your needs. Talk to an Elders finance broker to see whether your loan is still the best one for you and if there’s a better deal out there.