Over the last few months, there has been much speculation over whether interest rates will rise sooner than 2024. We have covered the very topic here, and also way back in July. Despite the RBA being reasonably confident it won't lift rates until 2024, economists are tipping a rate rise sooner.
It was, therefore, concerning to read a recent survey commissioned by the Finance Brokers Association of Australia that showed 66 per cent of borrowers would be under pressure if interest rates were to rise. Most (57 %) would not be able to make repayments if their mortgage were to increase by as little as $300 a month.
There is no time like the present to investigate ways to reduce the amount of interest you're paying on your home loan and to be ahead of the banks when the day finally arrives that interest rates start heading north.
Now is the time to look at what rate you are on and what better offerings are there. Currently, there's a big transition to fixed term rates, which has lenders scrambling to lower their variable rate products in a bid to keep borrowers on variable home loans, even as funding costs rise.
All of that is good news for borrowers, who will be able to choose between fixed and variable loans at lower interest rates.
When considering your options, look for the lowest rate you can find, and if you can fix it for a few years, then so much the better. Bear in mind the cash rate is currently sitting at 0.1 per cent, and RBA governor Philip Lowe has signalled the RBA eventually hopes to get the rate back to 2.5 per cent, if not more.
If you already have an offset account, it's time to be more clever about how you use it. If you don't have one, it's a great idea to see if it's a feature you can get when you refinance your loan.
Finance guru Nicole Pederson-McKinnon describes an offset account as "being able to use every dollar twice". An offset account is attached to your mortgage account. Your loan balance is reduced by the same amount for every dollar in your offset account, meaning you only pay interest on the difference. Ultimately you save more money off the loan's interest than you would, earning interest on the same cash in a savings account.
Many people throw their life savings into an offset account to reduce their mortgage by a considerable amount and don't do much more. However, Pederson-McKinnon suggests as well as aiming to have at least six months salary sitting in your offset account, disciplined borrowers should have their salary put into their offset account as well.
She suggests getting a 55-day interest-free credit card and paying all of your day-to-day expenses with that. When your next pay cheque goes into the offset account, use the previous month's payment to pay off your credit card in full. However, the caveat is that you need to have the self-control to stick to the plan, stay within your budget and pay the card off every month before you get hit with credit card interest, which can be painfully high.
Most people are on a monthly payment cycle for their home loan. By switching your repayments to fortnightly or weekly, you make additional payments and pay more off your loan.
There are 12 monthly repayments per year on the average home loan, but there are 26 fortnights in the year, which means you will pay an additional four weeks' worth of repayments on your loan by switching to fortnightly or weekly.
Not only will it reduce the principal on your loan, but it can have you paying your loan off sooner as well.
Ultimately to reduce the interest payable, you need to reduce the principal loan amount. If you have a tax refund, work bonus or another windfall due, throw it straight at the mortgage. It will reduce the interest payable and also reduce the life of your loan.
If you have the financial capacity to manage it, increase your repayment amounts each month. You don't need to be restricted to the lender's minimum repayment. Even if you can only afford $50 a week extra, that's $2600 per year in additional repayments that will ultimately reduce the amount of interest payable.
To investigate all the options that will work for your personal circumstances, it's best to chat with a mortgage broker, who will have access to a wide panel of lenders and home loan products, and can help you find the right solution for your needs.