Small steps – such as paying a little extra, paying weekly instead of monthly and keeping an offset account – can amount to big savings and slice years off your home loan. Here are some valuable tips from a banking expert.
SELECT A LOAN THAT SUITS YOUR CIRCUMSTANCES
St.George Bank’s national head of home lending Gavan Thompson says the first step is to “work out your budget”. “How much can you afford to borrow?”
Draw up a budget, showing combined household income and all expenses. This will help you work out how much you can afford in loan repayments.
“The next step is to think about what you are looking for in a home loan. How much do you rely on the certainty of repayment amount versus the flexibility to make extra payments?” says Thompson.
“A number of our customers look at splitting their home loan – part fixed interest and part variable. This way they have some certainty in the amount they pay each month, if it’s a monthly repayment plan, as well as the flexibility of variable. This allows you to make extra payments in lump sums or in small amounts, as often as you like.”
The main reason people refinance is to get a better deal. It’s an opportunity to find deals on interest rates and fees, or more appropriate loan features if your circumstances have changed. The cost of refinancing can vary. Make sure you seek professional advice on the associated costs charged by your current lender. Keep in mind that while exit fees can seem expensive, you may be able to include them in your new loan and still save over the longer term.
It’s also good to keep an eye out for special offers that could help make the switch between lenders – for example, St.George is currently running a cash back offer that could help cover some of the switching costs.
SET UP AN OFFSET ACCOUNT
“An offset account operates like a normal transaction account. The float (amount of money) in the offset account will reduce the loan balance and therefore save you interest. Even a float of $2000 or $3000 will save a bit in interest,” he says.
For example: The savings on a $300,000 loan at 4.5 per cent p.a. variable over a 30-year term with 100 per cent offset and a balance of $10,000 in the offset, against the same loan with no offset would be $26,811 in interest over the life of the loan, and you could pay the loan off one year and five months sooner.
PAY WEEKLY OR FORTNIGHTLY
“If you have a variable loan, you can make repayments weekly or fortnightly, instead of monthly. As interest is calculated at the end of each month, by paying weekly or fortnightly, you are reducing the amount of interest you pay each month,” says Thompson.
For example: on the same loan ($300,000 at 4.5 per cent p.a. variable over 30 years) if you were paying monthly repayments of $1,521.00 and decided to break it down to four $381 weekly repayments, you would save $44,896 in interest over the life of the loan and pay the loan off four years and eight months sooner.
CHOOSE A PACKAGE
“You can reduce account fees by choosing a package that incorporates various accounts – such as transaction, home loan and credit – all in one,” says Thompson.
SAVE ON MORTGAGE INSURANCE
“A lot of first home buyers have to pay mortgage insurance if their loan-to-value ratio exceeds 80 per cent. Loan to value ratio is the amount you borrow compared to the value of the property.
To help avoid paying mortgage insurance, some first home buyer’s family members may be able to guarantee the loan difference using their own home’s equity. Our St.George lenders can provide more information on this option,” says Thompson.
THE FINAL WORD
Thompson says a lot of people “don’t truly understand” the options available to them. He advises anyone who is considering a home loan to sit down with their lender and ask to walk them through the various options, explaining how they work.