Simple tips to save $170,000 in interest and slash years off your mortgage

Reducing the interest paid on your home loan is a smart financial move that can save you thousands of dollars in the long run

Your mortgage is likely to be your biggest household expense, and even though rates are coming down, at their current level, they’re likely leaving you feeling a little stretched.

Economists expect The Reserve Bank of Australia (RBA) to cut interest rates again soon, but you don’t need to wait for the RBA to reduce you mortgage repayments. Here are a few simple tips that can save you interest and cut years off your loan.

Refinance and beat the Loyalty Tax

The “loyalty tax” is known in the banking sector as the gap between the sharp pricing banks offer on loans to new customers (their front book) and their loans to existing customers (their back book). This difference results in longer-term customers paying more over time.

Now it’s understandable you don’t want to muck around with your bank accounts because you have salary being credited, and direct debits coming out, and all sorts of other things, but staying loyal to your bank could be costing you money. Just a half a per cent difference in the intreat rate on an average loan could mean savings of $162.00 each month. If you refinanced and managed to put that saving back into your loan, you’d pay your loan off 4 years sooner and save a whopping $84,239.00

Switch to weekly repayments

Making your mortgage repayments weekly rather than monthly might not seem like a big deal, but this little trick could help you pay off your loan almost six years faster.

Because there are 52 weeks in a year, by splitting your monthly repayment into four and paying each week, you end up making an extra month’s worth of repayments each year. Do this consistently over the term of a 30-year mortgage and you save $118,485 in interest and you'll reduce your loan term by 5 years.

If you combine this with your savings from not paying a Loyalty tax, the interest you can save is a staggering $170,123 and you’ll be home free 8 years sooner.

This strategy works because your mortgage interest compounds daily, meaning that every dollar you pay off sooner slashes what the bank can charge you later - and those savings compound over time.

Consider your loan structure

If you’re serious about getting debt free sooner, your loan structure matters. Consider whether you should use a fixed rate loan or a variable rate, but a combination of the two can be even better. Depending on the direction of the economy, fixed rates can sometimes be a lot lower than variable rates (as they are now) and they give you certainty around your repayments. When you split your loan, the variable portion provides you with the flexibility to implement the strategies above to pay off the loan sooner, the portion fixed at a lower rate give your certainty and addditional savings.

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To find out more about your home loan options call us on 0402 684 199 and talk to a home loan lending specialist.