There is a lot of noise in the media at the moment about rising interest rates and the impact they will have on mortgage holders who at the same time are also dealing with record levels of inflation and real wage declines. With rising price of fuel, electricity, gas and iceberg lettuce to name a few it can feel that it is hard to stay afloat.
so you are armed with the information to make the best decision for your personal circumstances. With the average Australian mortgage now $620,000, paying any more interest then you have to adds a significant cost to your budget and can add years to the length of time it will take to pay the loan back.
Recently I made a post on Linkedin regarding rising interest rates and a few quick tips in order to reduce your repayments whilst interest rates are going up. I received a number of messages regarding these tips and since the Reserve Bank of Australia has raised the official cash rate up another 1% since, I thought I would expand further on these tips and focus on how to actually pay your loans down faster.
Arguably, the best bang for your buck will be calling your existing lender and asking for a better deal. If you are the average Australian with the average mortgage and you can get a reduction of 0.5% on your current loan then that’s $3,100 saved interest every year. Not a bad return on investment for your time.
For this to work effectively you need to do your own research and compare your rate to other options in the market. Don’t be afraid to name the competitor and the rate and see if it can be matched. Interest rates are often priced based on the loan to value ration so if they ask how much your home is worth make sure you over estimate the value which reduces your Loan to Value ratio (LVR).
An offset account is a savings or transaction account linked to your mortgage. Your offset account balance reduces the amount you owe on your mortgage. This reduces the amount of interest you pay and helps you pay off your mortgage faster.
For example, for a $620,000 mortgage, if you have $100,000 in an offset account means you’re only charged interest on $520,000. The contracted loan repayments will stay the same and so each repayment you make this reduces the principle further because you are being charged less interest.
If your offset balance is always low (for example under $10,000), it may not be worth paying for this feature so ensure you enquire to see if there are any additional charges for an offset account.
Interest is calculated daily but charged monthly, if you’re currently paying monthly repayments consider switching to more regular fortnightly repayments. By paying half the monthly amount every two weeks you’ll make the equivalent of an extra month’s repayment each year (as each year has 26 fortnights) and be charged less interest through the same period.Depending on your loan type and structure you may be able to make additional repayments on top of the contracted minimum. For example, if you receive a tax refund then dump this into the loan rather than your savings account.