Home loan blitz

Save up to $80,000 in interest without paying a cent more

STORY EFFIE ZAHOS

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HOME LOAN INTEREST is calculated on the daily balance and paid monthly in arrears. So the more you can throw in, the more interest you can save. Of course, finding extra cash to pop into your home loan is easier said than done.

If your budget is already stretched to the max, don’t despair. There are ways you can save up to $80,000 in interest on your mortgage without having to put in an extra cent.

Package, basic or online direct

If you have a mortgage there’s a very good chance that you have a package. These loans offer a whole lot of discounts across a range of products, including the big one – a generous discount on the standard variable rate. How much of a discount you get depends on your lender and the size of your loan.

But are you automatically better off with a packaged home loan than, say, a basic no-frills loan or a discount direct loan such as those offered by UBank (a subsidiary of NAB), ING Direct and non-bank lender State Custodians?

After crunching the numbers on a $350,000 loan, the answer is “yes and no”. Let me explain. Perhaps surprisingly, when compared with a basic home loan a packaged loan wins hands down, by as much as $10,100 in interest savings.

Basic home loans are supposed to be the cheaper loans, as they tend to have limited features, but with rates so low at the moment, once you add in the interest rate discount the packaged home loan comes out in front.

Unfortunately, the same can’t be said when you compare a packaged loan with a discount direct loan. Here, with a packaged loan you’d be behind by as much as $28,000 in interest costs (see the table, Which loan?).

It is quite hard to do better than a discount direct home loan. Just make sure yours offers you the essential features you need. These are flexibility in repayments, fee-free redraw or mortgage offset, portability and a split facility. You should also factor in any refinancing costs if you do switch lenders.

Most lenders offer a suite of home loan products, so it’s worth checking with your existing lender first to see if they have a better deal. This could save you the hassle of switching.

The examples used in Which loan? all come from one lender. The online product belongs to a subsidiary of the main lender and, given it doesn’t charge a set-up fee, refinancing costs would be kept to a minimum.

Home loans linked to credit cards

Usually you get paid weekly, fortnightly or monthly, you then pay your mortgage and what’s left pretty much gets spent. Some of us do the right thing and put all our pay into a mortgage offset account to minimise our interest expense. This is definitely the right way to go but, if you have a little more discipline, you could save even more by using an interest-free credit card to extend the days that your pay stays in an offset account.

I’ll take you through it step by step. On pay day your entire salary goes into your mortgage offset account and in the process immediately reduces the amount on which your lender calculates your home loan interest.

Your mortgage repayment is either automatically taken from your pay or you have a direct debit set up to take it out of your offset account to go into your loan.

What’s left in your offset account is the cash you need to cover your living expenses, which you draw out when you need it.

By using a credit card to pay your everyday expenses – one which offers you a generous number of interest-free days – your pay can sit in the mortgage offset account for longer, reducing for longer the interest you pay on your home loan.

This was a strategy highlighted in Money’s February issue and one that’s worth mentioning again (see the table, Every bit helps).

Of course, it goes without saying that you need discipline to ensure you don’t spend more than your budget allows on your credit card and you pay it off before the interest-free period expires.

As an example, Jenny earns a net monthly salary of $4091.72 and opts to link her interest-free credit card with her home loan. On pay day all her salary goes into her mortgage offset account.

She uses her credit card to cover her everyday living expenses, paying it off before the interest-free period ends. Monthly living expenses total $2000. Compared with just making minimum repayments on her home loan, Jenny saves more than $5000 in interest by handling her affairs this way.

Savings would still be achieved if Jenny kept her salary in an offset account and drew on this for everyday expenses, but they wouldn’t be as great as when she uses her credit card for everyday costs and leaves her full pay in the offset account until she needs to repay her card debt (in full).

(Assumptions: No extra repayments are made into the offset account. Monthly expenses and the repayment are equal to Jenny’s salary. Credit card has at least 45 interest-free days on purchases. All expenses are paid on the first day of the month.)

Monthly, fortnightly or weekly

When it comes to slashing your interest bill by a good $60,000 or so, there’s no better or easier strategy than paying fortnightly. Whether or not you save this much all comes down to how you calculate your repayments.

Some lenders, when calculating fortnightly payments, take the monthly repayment figure, multiply it by 12 and then divide it by 26 to give you a fortnightly amount. While this is correct, it will not reduce your interest bill.

You need to halve your monthly repayment if you want to reap big interest savings. By taking the minimum monthly repayment, halving it and paying the halved amount every two weeks, you’ll save a substantial amount off both the term and interest. That’s because there are 26 fortnights in a year – the equivalent of 13 monthly repayments rather than 12.

As for dividing your minimum monthly repayment by four and paying weekly, you’ll save a little more in interest but not on the term (see the table, Pay more frequently).

The difference in how lenders may calculate repayments explains why online calculators can come up with different repayments even if the loan is the same.

If you’re on a monthly pay cycle, the best tip is to get in early. If you’ve just signed up for a home loan, don’t wait for your first repayment. As soon as you know your account details, start making your monthly repayment. If you’re an existing home owner, make repayments as soon as you get paid.

The advantage of having a variable home loan is that you don’t have to wait for your repayment date. The earlier you can make a payment the more interest you can save.

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