How To Reduce the Interest on Your Home Loan
You should always shop around for a better deal on all of your loans. The problem is that every time most banks put up the interest rate on their loans, people complain about it, but they don’t do anything about it because they can’t be bothered or don't know how. You often hear people say “what’s the point, all banks are the same”.
Did you know that banks have an introductory rate for new borrowers but charge their existing customers a higher rate ? Yep, you heard that right! They charge their loyal customers a higher rate than new customers. Yeah scumbags right! So for starters, why not at least ask your bank to match that!
Recently I had a client of mine ring their bank and this is what they said to them:
“Hi Mr Bank Manager I'm thinking of moving my mortgage over to another bank where they’re offering me an introductory variable rate at <insert your new rate %> for new customers. Plus their giving me a cash back offer of $X just to give them my new business. I’ve just completed the online application, so can you please tell me what steps I have to do to move across my mortgage,...unless of course you can offer me a better rate?
The chances are your bank manager will most likely give you a discount of some sort to keep your business. If not you always have the
option of actually switching banks. Of course the bank won’t want you to leave because they hate losing business and it costs them a
lot of money to get new customers.
In just one phone call my client SAVED $71,930 in interest over the life of the loan by moving across his mortgage of $400,000. Note: This is a very recent real life example! In fact after this client moved his home loan across, he then moved all of his investment loans and saved a small fortune!
I know what you're thinking...."what's' the catch?". Well for my client, he checked with his existing bank that there was no exit
penalties and then he switched. He did not get charged any loan establishments fees or other costs, so he's getting a real saving of
$71,930! The reality is that most people won't do it because they are too lazy. Remember like the saying goes, ASK and you shall
2. Consolidate credit card debt
If you have a credit card, you need to pay this off as a priority because the interest you get charged could be up to 20%. In the meantime, some banks will offer you interest free terms of up to 12 months, if you switch your card over. The idea, is to give yourself a breather for 12 months while you pile in as much cash as you can to reduce the debt. If you have credit card debts of say $20,000, switching your credit card across to a 12 month interest free period could save you up to $4,000 in the first year! But be careful, because after that time, they will revert back to their usual interest rate of up to 20% or sometimes more after the twelve month period, if your credit card is still not paid off, consider consolidating expensive credit card debt of up to 20 percent into your home loan which will be less expensive.
3. Make extra payments
Sounds simple enough, but setting this as a goal is essential to your overall strategy. If you have any spare cash, don’t let it sit around in your bank account – put it straight into your mortgage. The more you shave off the amount owed, the greater your equity becomes, the less interest you pay and the greater your future borrowing power too.
4. Make fortnightly payments
Ultimately, a structure whereby you pay half the usual monthly repayment fortnightly means you make about one payment extra a year. There are around 4.35 weeks per month in a 365-day year, or about 26 fortnights. With that in mind, paying $2,000 per month would net $24,000 in total payments. Paying $1,000 fortnightly would equal $26,000 in the year. This costs $2,000 more annually in this particular case, but it’s a method of increasing your payments in a balanced way.
5. Use a mortgage offset account
A standard variable rate loan generally offers you the option of putting 100% of your income and savings into an offset account to reduce your loan interest. So, by paying your income directly into this account you can take a big chunk out of the principal.
6. Don’t lower minimum repayments if rates fall
If ever intrest rates fall, it’s tempting to see it as an opportunity to get more cash to spend. If you had the discipline to pay the higher rate before, you should use this opportunity to pay off your loan fast.
As always, don't hesitate to contact us if you would like to discuss your situation.