How to save money on your mortgage

Amy Hamilton-Chadwick
How to save money on your mortgage

Please note: this article was first published in January 2015.

Your mortgage is probably your biggest fixed outgoing, and the one where you can save the most money. Yet for many of us, the mortgage is a “set and forget” financial arrangement, says Martin Hawes, authorised financial advisor and author of Save Money on Your Mortgage.

To save thousands of dollars over the life of your home loan, you can start by knowing just 3 basic tips:

SEE ALSO: How to buy a house with a low deposit

 

1. The more you pay, the more you save

The easiest, and usually most effective, way to save money is to increase your repayments or contribute lump sums of cash to the loan. The more you pay off, the less interest you are charged, and the impact can be immense.

“Just about everything is less important,” says Hawes. “Apply as much as you possibly can to the mortgage, because higher repayments will bring the term down and the total amount of interest will reduce dramatically”.

Even a smallish increase in repayments can be surprisingly effective. On a $300,000 loan*, for instance, the default monthly repayment will be around $1,933. Round that up to $2,000 and you’ll save $24,000 in interest and be mortgage-free almost 2 years earlier.

Push your repayments further and you’ll reap more rewards. Apply $2,200 to the same loan and you’ll save nearly $75,000 and be mortgage-free 5 years earlier.

 

2. Negotiating with the bank can cut thousands of dollars off your loan

Small reductions in your interest rate can make a huge difference to the amount you pay over the course of your loan, says Hawes. If you negotiate a 0.1% discount each time you fix, it can save you thousands.

Fix a $300,000 mortgage at 6% and your total interest over 25 years is $279,871. Fix it at 5.8% and you’ll save more than $10,000 over that time. Even better: make the repayments at the 6% level ($1,933 instead of $1,896) and you’ll save an additional $12,500.

Switching from one lender to another has traditionally been expensive and time-consuming, but strong competition between banks in recent years has made it far easier to change.

Hawes says you always need to run your numbers, but an interest rate special or cash offer may make it worthwhile to change banks.

“I would have little loyalty to any bank,” he says. “Loyalty needs to be generated by good pricing and good service. If something is genuinely on special, I would take advantage of it – providing it is largely by way of price rather than a gift you might not actually want.”

 

3. Managing your mortgage pays a great hourly rate

It’s so easy to fix your whole mortgage and then forget about it for another two years, but Hawes says actively managing a loan can seriously pay off. While a broker can take a lot of the work off your plate, you need to understand what you’re signing up for and make sure it’s right for you.

That means doing some research into the best structure, finding out whether revolving or offset loans could suit your situation, and finding out what’s on offer from various lenders.

Online mortgage calculators make it easy for you to work out any potential savings and weigh up the benefit of additional repayments, so you’re well-informed about the true cost of your loan.

Can’t be bothered poring over spreadsheets and online mortgage calculators? Find it all too boring? Think about it from another perspective: If you manage to cut your interest rate by 0.25% and find an additional $100 a month for repayments, you’ve saved $45,500 over the course of your $300,000 loan. If it takes you 6 hours every 2 years across the loan, that’s like being paid $630 an hour for your efforts.

And if the calculations are getting too complicated, ask the bank to get its spreadsheets working on your behalf – if you ask the right questions, the bank (or your mortgage advisor/broker) can provide all the answers you need to make the best possible decisions about your home loan.

Need help picking the right home loan for you? 

Check out our short videos explaining the difference between fixed and floating interest rates and different types of loan structures.

SEE ALSO: How to buy a house with a low deposit

 

*Basic example loan of $300,000 used here is calculated over 25 years at a fixed interest rate of 6%.

All figures quoted are approximate.

 

Property ambitions?

Westpac has handy tips, info and mortgage calculators to help:

 

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