What's happened to your home mortgage bill over the last year?
The interest bill on the average $580,240 owner-occupied home loan is $792,693, meaning the true cost of the typical home loan in this country is $1.37 million, according to financial comparison site, Canstar.
The analysis is based on the Reserve Bank of Australia’s average standard variable interest rate over the past 30 years of 6.88% and assumes the borrower takes 30 years to repay the Australian Bureau of Statistics current average loan amount.
Canstar’s Editor-at-Large and money expert, Effie Zahos says,
“The Reserve Bank has left the cash rate on hold for the third consecutive month but that doesn’t mean the interest bill on mortgages will remain steady.
Interest continues to be calculated on the daily balance and charged monthly in arrears.
What will surprise a lot of mortgage holders is just how much interest we pay on our home loans.
The longer we take to pay off our mortgage the bigger our interest bill will be.
This is a concern because there is a growing number of Australians aged over 55 living with a mortgage.
Research shows that in 2021, 23 percent of over 55s had a mortgage, which is up from 19 percent in 2011.
That’s over half a million more older Australians living with a mortgage than a decade ago.”
Canstar’s research shows property price growth over the past 10 years has during that time covered the loan interest costs in the majority of states and territories.
A homebuyer who purchased an average-priced property 10 years ago in NSW for $580,000 with a 20% deposit would have paid approximately $193,696 in interest costs on their $464,000 loan over this period.
At the same time, the value of their property would have grown by an estimated 6.5% per annum or $508,740 in 10 years, putting the borrower $315,044 ahead after interest costs have been accounted for.
Average Home Loan Interest Costs vs Property Price Growth Over Past 10 Years
|10 Years Ago||Over the Past 10 Years||Overall Change (property growth less interest costs)|
|Average Property Price||Loan Amount (80% LVR)||Loan||Property Value|
|Interest Costs||Avg Annual Change||Change in Value|
Source: www.canstar.com.au - 05/09/2023.
Mortgage holders in WA have forked out nearly as much in interest costs over the past decade as those in NSW at $191,258.
However, property prices in WA only rose on average by 1.6% per annum or $98,519 over 10 years, leaving a $92,739 shortfall between what they paid in interest compared to the property price growth during that time.
Likewise, borrowers in the NT have not seen enough property price growth over the past decade to make up for the $164,375 interest bill on the average loan taken out in 2013.
Noting that this analysis doesn’t take into consideration any equity borrowers may have accumulated by paying off their loans.
“Many Australian property owners have been very fortunate to have seen sustained property price growth in a number of the country’s key markets but it’s not always guaranteed.
Some borrowers haven’t experienced the price growth needed to outweigh their loan’s interest costs.
Slower property price growth and repaying a loan at a rate that’s less than competitive can compound the problem.
On an average $580,240 loan at a rate of 6.88 percent your interest bill over 30 years is around $792,693.
This is equivalent to paying 137 percent of the original loan amount to the bank.
Repaying your loan at a rate of 5.88 percent, which is one percent less, could reduce your interest bill by $136,623 down to $656,070, which equates to paying an extra 113 percent of the original loan amount to the bank.
The more interest a borrower pays, the more this bill eats into their potential profit.
When selling a home, we factor in agent fees and stamp duty paid but often we forget to take into account our interest bill.”
1. Make more regular repayments
Interest is calculated on the daily balance of a home loan and charged to the loan account monthly.
If borrowers can reduce the daily balance, even by just $1, they will save on both interest and the time it takes to repay the loan.
“The trick to saving on your interest bill comes down to how you calculate your repayments.
By taking the minimum monthly repayment, halving it and paying the halved amount every two weeks, you can save a substantial amount in interest.
That's because there are 26 fortnights in a year – the equivalent of 13 monthly repayments rather than 12.”
Rounding repayments to the nearest $10 and making fortnightly repayments on the average loan of $580,240 at a variable rate of 6.88% could cut the interest bill by $203,680 over 30 years, from $792,693 down to $589,013.
At the same time, it would reduce the time taken to repay the loan by six years and eight months.
2.Put savings into your offset account
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Australian households combined have more than $1.3 trillion in savings and deposit accounts.
If mortgage holders were putting their savings into an offset account linked to their home loan, they could be slashing their interest bill.
“On payday consider putting your entire salary into your offset account and using an interest-free credit card for your living expenses,” says Zahos.
“This way your home loan balance is ‘offset’ by the amount of your pay so you end up paying less interest.
This strategy only works if you don't spend more than earn and you repay your credit card before the interest-free period ends.”
Having $10,000 from day one in an offset account attached to the average owner-occupied loan of $580,240 being repaid at a variable rate of 6.88% could save $64,243 in interest, cutting the bill from $792,693 down to $728,450 and shaving one year and four months from the time taken to repay the loan.
3. Switch to a lower rate
Refinancing to a lower interest rate loan is a great way to slash the interest bill.
Canstar’s analysis shows switching the average owner-occupied loan size of $580,240 from a variable rate of 6.88% to the lowest ongoing variable interest rate in the market today at 5.45% could reduce the interest paid on a 30-year loan by $193,444.
“12 cash rate hikes have seen a record number of homeowners refinance with the latest figures showing a new peak of $21.5 billion worth of loans switched to a new lender in July.
It’s an easy way to lower your interest bill.
Even though the cash rate has been paused, homeowners should continue the practice of giving their home loans a spring clean – that is reviewing their rate every 12 months.”
Home Loan Savings Strategies Based on Average Loan Size of $580,240
|Rate||Repayment||Annual Repayments||Total Interest Costs||Repaid In|
|Base Case||6.88%||$3,814||$45,764||$792,693||30 years|
|Fortnightly Repayments||6.88%||$1,910||$49,660||$589,013||23 years & 4 months|
|Difference||-||-||+$3,896||-$203,680||-6 years & 8 months|
|$10k Offset Balance||6.88%||$3,814||$45,764||$728,450||28 years & 8 months|
|Difference||-||-||-||-$64,243||-1 years & 4 months|
|Refinance to Lowest Variable||5.45%||$3,276||$39,316||$599,249||30 years|