Six ways to save on your home loan

With interest rates sitting fairly high, many people are feeling the pinch.

Indeed, it really pays to look at what you can do to cut the cost of your mortgage.

Here are six ways to save on your home loan costs – and you might even finish up with a better mortgage.

1. Talk or walk

The lenders are keen for your business – if you’re a good bet – and will put up a good fight to keep you, or lure you, as the case may be.

For example, some lenders offer professional packages with up to 0.7 per cent off their standard rate – but don’t always advertise the fact. Good knowledge of the market can help here, which is where a good mortgage broker can really help.

Also, the easiest way to negotiate is through a mortgage broker. We can sometimes be privy to special deals they don’t even know about in the branches, or aren’t allowed to offer you.

2. Consolidate – or not?

Lenders are keen for you to consolidate your debts with them and, in many circumstances; this can pay off by reducing the interest rates on certain borrowings (e.g. personal loans) by transferring the debt into a lower interest product such as your home loan.

However, by keeping your loans with at least two lenders can be a good strategy too, as it keeps them all on their toes. By not bundling your loans with one lender you can play one off against the other.

Also, if a good product is offered by one of them you can move your business quickly, rather than having to unbundled everything and start again with a new lender.

3. Fix, blend or vary

This often comes down to a combination of factors: where are we on the interest rate cycle, what are your personal circumstances, and how conservative are you?

If interest rates are near the top of the cycle, and fixed rates are not much less than variable rates, then it would not be the best time to fix a loan.

But fixing when interest rates look more likely to rise, or when fixed are significantly below variable rates, can be a good decision. Be careful when selecting the fixed rate product, however, as some lenders won’t allow extra repayments and set higher exit penalties to break the loan early.

Blending the home loan with a mix of fixed and variable can be a good hedging strategy, particularly if you take a more conservative approach to borrowing. If rates rise then the fixed part of the loan will protect you to some extent from higher repayments. On the other hand, if interest rates fall then the variable part of the loan allows you to enjoy some of the decrease in repayments.

It is still the case, though, that the majority of borrowers take out a straight variable interest rate loan.

4. Pay more often

Many loans will let you pay fortnightly or even weekly. Putting money in a bit earlier than a straight monthly payment will help reduce interest owed, which is normally calculated on a daily basis. However, the main gain comes if you do some “fuzzy maths”.

For example, if you divide your monthly payment by two and pay fortnightly then over a year you’ll end up paying 26 fortnights, or the equivalent of 13 months of repayments. Repaying this extra month each year will cut years off your loan.

Some of the basic “no frills” loans can have a sharp interest rate, but don’t allow you to make these extra repayments – so you don’t have the opportunity to pay the loan off more quickly.

5. Redraw and offset

There’s a lot to be said for having a home loan with a redraw facility or a linked 100% offset account.

They do help to cut the cost of your mortgage of course, especially if you have your salary paid directly into them and then withdraw gradually over the following days and weeks as you need to. But despite the fact that you’re making an extra repayment for a short period, the savings only run into the hundreds – not thousands.

Another benefit, however, is the tax break. By saving your money in your home loan or an offset account, then you are avoiding paying tax on the interest. This is a nice bonus from the Tax Office, so take advantage of it for any savings you’re making – holidays, car purchase, renovation, etc.

6. Tax breaks for investors

Speaking of tax, lenders are surprised at the number of investors who have a normal principal and interest mortgage on an investment property.

Since they’ve often bought the property for negative gearing it’s self-defeating to limit the benefit, but that’s what they’re doing. Instead you should take out an interest-only loan on your investment property and use the savings in repayments to knock more off the home mortgage.

This way you’re getting a bigger tax deduction on your investment, and at the same time chopping back your non-deductible mortgage. Sounds like a win all round.