Home buyers can save thousands of dollars by repaying their home loans more quickly by making extra repayments and using offset accounts, with the head of banking business act., Amanda Watt, who warns borrowers should watch out for some traps on no-frills and fixed home loans which may restrict repayments.
Watt recommends the following seven home loan tips for home buyers who want to get on top of their mortgage sooner.
Tip 1: Repay extra.
If you’ve got extra cash, put it straight on your home loan and save money.
The more of the principal you repay now, the more you’ll save.
If you hold an average first home buyer’s loan of around $350,000 taken over 25 years at a rate of 5.5%, you can save $30,475 in interest costs simply by putting an extra $100 on your loan each month.
And you’ll be debt free sooner.
Watch out for this on fixed loans as you may incur charges on extra repayments or you may only be able to repay an extra 5% to 10% of the loan amount.
Tip 2: Reduce your loan term.
When you’ve got a home loan, time means money.
So the quicker you repay your loan, the less interest you’ll pay.
If you take 12a $350,000 loan over 25 years at an interest rate of 5.5%, you’ll pay $294,791 in interest over the life of the loan if you repaid in monthly instalments.
But if you repaid the loan over 20 years, you’d pay $227,825 in total interest costs – that’s a saving of $66,966!
Tip 3: Use an offset account.
Offset accounts are a great way to cut interest costs.
Offset accounts link your home loan to a savings or transaction account.
The balance in the savings account is then used to offset the home loan balance, reducing interest costs.
As interest is calculated daily on the home loan, the benefit to borrowers accrues as soon as there is cash in the offset account.
There are tax benefits also as tax isn’t paid on the interest credited to your savings account because the interest is not actually being earned as it offsets the home loan interest.
Tip 4: Save a bigger deposit.
The more you borrow, the more you will repay in interest.
So, if you are saving for your first home, start making the sacrifices now and save as much as you can before you buy.
Make sure you claim the first home owner’s grant and any other subsidies state governments offer.
Tip 5: Fixing your loan.
Locking in part or your entire home loan could provide good security against future rate rises.
There’s a chance that interest rates have bottomed this year and we’ll get a rate rise next year and a fixed rate could insure you against this.
But the risk is that if official interest rates fall, you’re stuck with the fixed rate for the term of the loan.
So splitting your loan between variable and fixed portions to take advantage of both types of loans may make sense.
“But you need to check whether you can make repayments, as many fixed loans on the market do NOT allow for extra repayments, limiting your choices. act. fixed loans allow limited repayments and also have partial offset facilities, something many other fixed home loans don’t offer,” said Watt.
Tip 6: Opt for a basic home loan.
Most lenders offer basic home loans without the frills.
Interest rates start from about 4% a year and for that, you might get a simple principal and interest loan on which you can make monthly repayments.
Such loans may suit you if you’ve got a tight budget and simply want the lowest cost home loan.
But they can have pitfalls if you can’t make extra repayments and such loans typically don’t offer offset facilities, which can help reduce interest costs.
Tip 7: Negotiate.
Some lenders are waiving establishment fees on loans and fees such as valuation costs or negotiating on interest rates to win home loan business.
So ask about the best possible offer.
act. is a newly established banking service that redirect profits back into social projects.
The calculator on act.’s banking page reveals how impact dollars customers generate each month by banking with act.
Home loans will generate the greatest amount of impact dollars.
For example, a customer that holds an average first home loan size of $350,000 mortgage with act. could generate approximately $43 a month to reinvest in the social project of their choice.