Home buyers can
save thousands of dollars by repaying their home loans more quickly by making
extra repayments and using offset accounts. You need to watch out for traps on
no-frills and fixed home loans which may restrict repayments.
The following seven
home loan tips for home buyers who want to get on top of their mortgage are:
TIP 1: REPAY
EXTRA.
If you’ve got extra
cash, put it straight on your home loan and save money.
The more of the
principal you repay now, the more you’ll save.
If you hold an
average first home buyer’s loan of around $350,000 taken over 25 years at a
rate of 5.5%, you can save $30,475 in interest costs simply by putting an extra
$100 on your loan each month.
And you’ll be debt
free sooner.
Watch out for this
on fixed loans as you may incur charges on extra repayments or you may only be
able to repay an extra 5% to 10% of the loan amount.
TIP 2:
REDUCE YOUR LOAN TERM.
When you’ve got a
home loan, time means money.
So the quicker you
repay your loan, the less interest you’ll pay.
If you take 12a
$350,000 loan over 25 years at an interest rate of 5.5%, you’ll pay $294,791 in
interest over the life of the loan if you repaid in monthly instalments.
But if you repaid
the loan over 20 years, you’d pay $227,825 in total interest costs – that’s a
saving of $66,966!
TIP 3: USE
AN OFFSET ACCOUNT.
Offset accounts are
a great way to cut interest costs.
Offset accounts
link your home loan to a savings or transaction account.
The balance in the
savings account is then used to offset the home loan balance, reducing interest
costs.
As interest is
calculated daily on the home loan, the benefit to borrowers accrues as soon as
there is cash in the offset account.
There are tax
benefits also as tax isn’t paid on the interest credited to your savings
account because the interest is not actually being earned as it offsets the
home loan interest.
TIP 4: SAVE
A BIGGER DEPOSIT.
The more you
borrow, the more you will repay in interest.
So, if you are
saving for your first home, start making the sacrifices now and save as much as
you can before you buy.
Make sure you claim
the first home owner’s grant and any other subsidies state governments offer.
TIP 5:
FIXING YOUR LOAN.
Locking in part or
your entire home loan could provide good security against future rate
rises.
There’s a chance
that interest rates have bottomed this year and we’ll get a rate rise next year
and a fixed rate could insure you against this.
But the risk is
that if official interest rates fall, you’re stuck with the fixed rate for the
term of the loan.
So splitting your
loan between variable and fixed portions to take advantage of both types of
loans may make sense.
"But you need to
check whether you can make repayments, as many fixed loans on the market do NOT
allow for extra repayments, limiting your choices.
TIP 6: OPT
FOR A BASIC HOME LOAN.
Most lenders offer
basic home loans without the frills.
Interest rates
start from about 4% a year and for that, you might get a simple principal and
interest loan on which you can make monthly repayments.
Such loans may suit
you if you’ve got a tight budget and simply want the lowest cost home loan.
But they can have
pitfalls if you can’t make extra repayments and such loans typically don’t
offer offset facilities, which can help reduce interest costs.
TIP 7: NEGOTIATE.
Some lenders are
waiving establishment fees on loans and fees such as valuation costs or
negotiating on interest rates to win home loan business.
So ask about the
best possible offer and ask at different banks/building societies etc.
Jason Gwerder
Friday, 6 May 2016
