The downside is that the interest bill over the life of the loan can be substantial.
For example, if someone were to borrow say $300,000 over 30 years with an average interest rate of, say, 5.0% p.a., they would pay interest of $279,767 over those 30 years, as shown in Table 1 below.
They would pay almost as much in interest as the amount they borrowed. It’s similar for bigger loans. If someone borrowed say $750,000 over 30 years with an average interest rate of 5.0% p.a., they would pay interest of $699,418 over those 30 years.
It makes sense, then, to do everything we can to reduce our home loan interest bill. Strategies you can use to pay less interest and pay off your home loan sooner include:
1. Find the cheapest loan you can
Making sure you have the lowest interest rate possible is a highly effective way to save on interest repayments. But make sure you also take into account the fees charged by the lender because they can make a seemingly cheap loan expensive. Our home loan consultants can help you find a loan which has a competitive interest rate and fees.
Don’t take a loan with ‘bells & whistles’ you’ll never use Usually you’ll pay for those extras with a higher interest rate or with additional fees.
2. Be careful of ‘honeymoon rates’
Sometimes these cheap rates are just a lure to lock you in, and once the honeymoon period is over they are followed by higher- than-normal interest rates or by excessive fees.
3. Make extra repayments
Any extra repayments you can make will reduce the amount of interest you pay. A good strategy can be to try to make your repayments fortnightly rather than monthly i.e. you divide the monthly repayment by two and then repay that amount each fortnight. Because there are 26 fortnights a year – but only 12 months – you end up paying the equivalent of an extra month’s repayment each year.
4. Use an offset account
The key here is to arrange to have your salary paid into your offset account. This is counted by the lender as a temporary repayment and therefore reduces your interest bill. In the meantime, you use your credit card for your living expenses, and you pay that off at the end of the month by withdrawing money from your offset account.
5. Try to avoid Lenders’ Mortgage Insurance
Some lenders aren’t as strict on their criteria in determining who has to buy this insurance.
6. Consolidate your loans
If you have a number of loans with different interest rates you could benefit by consolidating them all into your home loan. The key here is to maintain the original combined repayments so you pay down the loan as fast as you can.