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With the right strategy, it’s possible to cut years off your mortgage term and furthermore, save a significant amount of money on interest. But which strategy is right for you?

With the right strategy, it’s possible to cut years off your mortgage term and furthermore, save a significant amount of money on interest. But which strategy is right for you?

Compare home loans

Even if you have had your home loan for a number of years, it is still important to regularly compare it with other home loan products on the market. This is to ensure you still have the most competitive option for your situation.

However, when comparing home loans, it is important not to apply with another lender unless you intend to refinance. If you do hand in an application, lenders have your permission to check your credit history on your credit report and by doing this they leave an enquiry relating to your current application. Multiple enquiries on your credit file can cause problems if you decide to apply for credit down the track.

Fortnightly Payments

With some loans fortnightly repayments are calculated by dividing your monthly repayment in half. You then repay that amount every two weeks. If effect this results in you actually paying the equivalent of one extra monthly repayment each year. Here is an example to illustrate. If your repayment is $1,000 per month then over the year this will add up to $12,000 for the 12 months. If the lender calculated your fortnightly repayment at $500 which is half the monthly repayment, then over 26 weeks in the year you would pay $13,000. This is a great way of getting ahead on your home loan.

Be careful though, only some lenders calculate the fortnightly repayment this way. Other lenders calculate fortnightly repayments so that you pay the same amount if you pay fortnightly or monthly. Using the example above, if you asked to change your repayments to fortnightly, the lender would divide your yearly $12,000 in repayment by 26 weeks to get a fortnightly repayment of $462. At this repayment you will pay the same amount and don't get any real benefit from paying fortnightly apart from some minor interest savings due to the repayment hitting your account sooner.

So don’t automatically assume that because you choose fortnightly repayments you will be ahead. Always check with your lender and ask which way they do the calculation. If in doubt, calculate the fortnightly amount yourself and tell them this is what you want it set to rather than going with the figure they give you.

Lump sum repayment

If you come into extra money, such as a work bonus, a gift or tax refund, putting it towards your home loan can reduce the principal and saving you interest. If you weren’t expecting it then you might not even miss it! 

Check up

According to RP Data, Australian mortgage holders refinance their home loan every 4½ years. It can be beneficial to regularly check up on your home loan to ensure it is still the best option for you. You may find that other lenders now offer a more competitive rate, better features or there is a new home loan product that better suits your needs. Always factor in the cost of refinancing which will include discharge fees, cost to setup the new loan and government charges to transfer the mortgage. If you change over too often then the changeover costs could be eroding the savings that you anticipated.

Budget

Budgeting will be essential if you are going to put more money towards your mortgage repayments. If you are determined to put extra funds towards your home loan, you may need to eliminate some luxuries. For example, daily coffees, weekly takeaway meals and gym memberships all eat away at your income and there are possible cheaper alternatives that you can switch to.

Don’t redraw

Your home loan may allow you to pay  extra funds into it as well as withdraw it. However, the longer you can keep these funds in your loan, the less interest you will pay. Also, if your lender charges a fee every time you withdraw, you could end up wasting a lot of money on these fees. This is where budgeting and planning comes into play. If you are able to set aside an amount of money that regularly goes into the offset account and stays there, it could help you pay off your home loan a lot faster.

Be wary of the honeymoon or not

Introductory or honeymoon rates initially have a very competitive rate in order to attract borrowers, however, often after the introductory period ends, it will revert back to a less competitive interest rate. Borrowers need to look beyond the first few years of a mortgage and keep in mind that this is a 20-30 year commitment. So although you may save money initially, what will it end up costing you in the long run?

State Custodians has a honeymoon rate that works in reverse. On selected loans we offer a bonus rate drop which means that the interest rate will actually decrease after 5 years. This means that you can start with a competitive rate and then after 5 years the rate will be market leading. Rewarding loyalty in this way not only saves the hassle of refinancing but also could save you money in changeover costs if you are keen to chase a cheaper rate. Check out our home loans here.