With Aussie mortgage holders witnessing thirteen interest rate rises over the last two years, it’s no wonder many have been feeling the financial pressure.
The rate hikes have put enormous strain on many Aussie households, with many defaulting on their mortgage payments or being forced to sell their homes.
The RBA has held the current cash rate in Australia at 4.35 per cent since December 2023; however, that’s up from a record low of 0.10% during the COVID-19 pandemic.
Banks have passed these extra costs to mortgage holders with the average variable rate loan for an owner-occupier property with a loan-to-value ratio of less than 80 per cent now reaching 6.8 per cent.
While that may be a lot, some home owners are paying back even more, with new research from financial information platform MNY finding significant differences between what lenders offered.
A recent article by Build-it revealed that some mortgage holders end up paying twice the amount of interest compared to other homeowners who borrowed the same amount.
By refinancing to an alternative provider, homeowners who are set to repay triple the amount they borrowed in total could only pay back double instead (based on current interest rates).
But even if you’re on the lowest rate and fee schedule possible, there are still plenty of handy tricks available to help bring down your mortgage costs.
Build-it spoke to MNY Business Analyst and mortgage expert Sabina Khanusiak, who revealed her top tips for minimising the interest paid over the life of a home loan.
1. Use an offset account
An offset account is an everyday savings account that is linked to your loan, any money deposited into the offset account remains accessible.
The balance of this account is offset against what you owe on your mortgage, with interest calculated on the lower amount.
This reduces the monthly interest paid and can significantly reduce the total amount you repay over the total life of your loan.
“You can deposit and withdraw money from your offset account as you would on a normal, everyday savings account,” Sabina told Build-it.
There’s a good chance you could add this product to your existing loan, with 56 per cent of lenders offering an offset account.
2. Choose fortnightly or weekly repayments.
By choosing to pay off your mortgage fortnightly or weekly, you will incidentally pay off your mortgage faster while also reducing interest over the life of your loan.
This is because the amount you’ll be paying interest on will be reduced weekly rather than at the end of every month.
Meanwhile, by paying weekly, you will incidentally pay more of your mortgage off than if you paid per month. This is due to the extra days in most months that make them longer than four full weeks, which means mortgage holders paying weekly will make the equivalent of one additional monthly payment each year.
“You will make extra repayments each year without realising it,” says Sabina.
3. Consider a Split Interest Loan
A popular strategy in times of economic uncertainty is switching to a split-interest loan, which can be beneficial.
More than 95 per cent of lenders currently offer split-interest loans, dividing your home loan between a fixed-interest and an interest-only portion.
“When cash rates go up, repayments on a fixed interest account stay steady,” Sabina explains.
“When interest rates go down, repayments on the variable interest account drop, making the most of the fluctuations.”
This allows the mortgage holder to enjoy the stability of fixed rates while also taking advantage of any potential rate drops.
4. Save a larger deposit
Your loan-to-value ratio (LVR) is the amount you are borrowing vs. your home’s total value. A lower LVR means a larger deposit and lower loan amount.
This figure is essential as it influences how much you need to borrow and the amount of interest you’ll pay.
Choosing a higher LVR loan might seem attractive due to the lower upfront cost and the opportunity to purchase a more expensive property. However, it also means you will pay significantly more interest over time.
This will impact your repayments and could put you in significant mortgage stress if interest rates rise.
“While (a deposit of) $30,000 might seem more achievable, it does mean you will need to borrow more and ultimately pay more interest,” Sabina says.
5. Do your research
There’s more influencing your mortgage repayments than just the variable interest rate.
Lenders often charge fees for products, services and add-ons – some of which you may not be using at all or another lending provider may not charge for.
Some lenders charge upfront fees as high as $1,195, while others impose annual administration fees up to $491. Meanwhile, products such as an offset account often incur an additional charge.
Check these and determine if you can cut out any annual payments or fees for products you don’t use.
An excellent way to review the amount you are paying is by checking the comparison rate of your loan. Which factors in both interest rates and additional fees.
“Investigating additional fees and comparing them between lenders can make a significant difference to your home loan repayments,” Sabina explains.
“Navigating home loan products and understanding the disadvantages and benefits of each can be daunting, but it is worth the effort in the long term.”
“Buying a home is the biggest financial commitment most people will make. Choosing carefully could mean the difference between repaying your loan three times over or twice. That is a significant difference on a $600,000 loan.”
