5 Ways to Save Interest on Your Home Loan

What’s more important, your interest rate, or the amount of interest you pay?

Saving money on interest is something we are thinking about a lot right now. With interest rates and loan balances high, as well as the cost of living. We are looking at where our money goes with a lot more scrutiny. Getting a lower interest rate can save you thousands. However, just picking the lowest interest rate, could actually mean you pay more interest.

Interest is not just simply your balance multiplied by your interest rate. Both those figures do make a huge difference however there are other things you can do to help.

1) Weekly payments – Interest is calculated daily and charged monthly. As the balance of your loan decreases each week there is slightly less of a balance for interest to be charged against. This may be a small amount however it can really add up over a 30-year term. Also, if you work out your weekly payment by simply dividing your monthly payment by 4, you will pay an extra month every year. This is because there are more than 4 weeks in most months.

Fortnightly repayments – Fortnightly repayments have a similar advantage as weekly and may fit your pay cycle better. Again, dividing the monthly repayment by 2 and paying it every 2 weeks (rather than Bi-monthly) will mean an extra month every year is paid.

Whichever way you go, make sure the minimum is covered by the due date.

2) Rounding up – Say you work out your repayments to be $523 a week, look at making a payment of $550 instead. That extra $27 a week could take 3 years off your loan and save $55K in interest. (Calculations based on a loan of $400K with an interest rate of 5.50% over a 30-year term). Talk to your broker/banker about how much you can save on your loan. Most loans will allow extra repayment and even most fixed loans let you pay a certain amount without penalty. Look at your budget and work out what you can pay extra and check if there are any limits on your home loan.

3) Offset – An account with offset may have a slightly higher interest rate, however, you may end up paying less interest with it if you are a saver. Offset accounts are accounts that save interest instead of earning interest. As I mentioned in previous points, your interest is calculated daily. This is based on your interest rate and your loan balance minus any funds in your offset account. If your loan is $400,000.00 and you have $30,000.00 in your offset account, you will be charged interest based on a balance of $370,000.00. There are even a few financial institutions that offer offset accounts on fixed-rate loans.

4) Redraw – A lot of loans have the ability to redraw extra funds you put into the loan account. It works very similarly to offset accounts. As far as interest calculations are concerned, they are the same. The differences that come into play are the tax implications if you are using the property as an investment or think you might in the future, and the accessibility. It’s a good idea to check in with an accountant for tax implications when structuring lending for investments or future investments. Redraw accessibility is very similar to an offset in most circumstances however an offset account is generally a transactional account and therefore can usually have a card attached. There is also still a bit of concern amongst people after the 2020 ME Bank scandal where clients redraw funds were taken from customers and their loans reduced, however, they backflipped on this very quickly.

5) Shorter Term – If you can service a loan over a shorter term, this is an excellent way to save interest. Let’s take the loan we used in point 2. $400K, 5.5% interest rate. Having a loan term of 25 years instead of 30 years will save $80,750.06 in interest. This would mean your minimum repayments are $566 per week instead of $523. This is a strategy similar to paying extra but can mean you are not tempted to redraw the money later. You will need to consider different options to find what is right for you.

Obviously taking all these points into consideration and still getting a lower rate is the best scenario, however, make sure you look at what a loan with a lower rate is really offering before deciding if it is the best. Remember, if you have a variable rate, you can always call your bank for a lower rate. Most banks will review every 6-12 months and almost always can offer something to keep you.