Mortgage interest rates are sitting at a six-year higher and could rise even more. If you're a borrower, there are some basic steps you can take to reduce interest costs.
Step 1: Shop around for your mortgage
It's never been a better time to negotiate with lenders as the big banks are undercutting each other on interest rates to win your business.
A slowing property market in 2006 scared many of the big lenders and competition shot up in the home loan market.
So if you're after a home loan, go to ALL of the big banks and other lenders and ask them for a discounted interest rate.
At the moment, the big banks advertise standard discount of 70 basis points to 7.37 per cent if you borrow larger amounts, usually more than $250,000, but banks are giving bigger discounts to people who ask and shop around.
The more you borrow, the more likely they are to chop 80 or even 85 basis points of the standard variable rate (SVR) of 8.07 per cent.
If you haggle hard enough and trade lenders off against each other, you'll probably get a better deal than if you simply went to one lender and asked for the best deal.
Step 2: Fix your mortgageloan
Fixed rates on home loans currently sit well below the standard variable rate (SVR) of 8.07 per cent.
Three-year and five-year fixed rate home loans are priced below the 8.07 per cent standard variable rate.
Locking in your home loan could provide also good security against a rate rise. With today's strong economy, there's a chance we'll get another rate rise this year or next after three in 2006.
But the risk of fixing is that if interest rates fall, you might miss out on a cut in official interest rates. You're stuck with the rate you locked in at for the duration of your fixed loan. And the loan might limit extra repayments so check this.
Step 3: Make more mortgage repayments
One of the easiest ways to cut your interest costs is to repay in fortnightly instalments rather than monthly.
You'll save thousands of dollars each year on your loan repayments and you'll be surprised by the numbers.
There are 26 fortnights in one year but only 12 months. If you split your monthly repayment into two, paying fortnightly means you would effectively be making 13 monthly repayments each year.
If your loan is worth $200,000 and you repaid in fortnightly instalments at an interest rate of 8.07 per cent rather than monthly, you'd save almost $100,000 in interest costs over 30 years (or $99,647 to be exact).
If you borrowed $400,000, you'd save almost $200,000 in interest costs over the life of your loan, or $193,295 to be exact.
Step 4: Go for a basic home loan
Most lenders offer basic loans with few frills. Interest rates start from about 7 per cent and for that, you might get a simple principal and interest loan on which you make monthly repayments.
Some lenders offer loans online without the personal support and some just offer cheaper no-frills loans, especially the non-bank lenders. These loans may suit you if you've got a tight budget and can't afford to make extra repayments and simply want the lowest cost home loan.
But there might be traps here so watch out. Some basic home loans limit extra repayments and redrawing, which allow you to save interest.
Some simple loans don't allow fortnightly repayments, only monthly, so what you save in up-front interest costs you may lose in flexibility which allows you to limit interest costs over the longer run.
Step 5: Repay extra on your mortgage
If you've got extra money and you don't need it, put it straight onto the home loan and save money. The more of the principal you repay, the more you'll save, especially if you repay extra earlier on in your home loan when interests costs suck up most of your mortgage repayments.
Take an example. If you've got a home loan of $200,000 taken over 30 years at a rate of 8.07 per cent, you can save almost $50,000 in interest costs simply by putting an extra $50 on your loan each month, or $47,965 to be exact. You'll also reduce your loan term by 3 years and 5 months. So you'll also be free of debt sooner.
Step 6: Use an offset account with your mortgage
Offset accounts are great strategies to reduce your. Offset accounts into which you put your salary and surplus cash 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, thus reducing interest costs. As interest is calculated daily on a home loan, the benefit to borrowers accrues as soon as there is cash in the transaction account.
Using a credit card to pay for expenses allows you to keep your money in the offset account for any interest-free period given by the card.
There are tax benefits to an offset account. Tax is not paid on interest credited to your savings account because the interest is not actually being earned, but it instead offsets the home loan interest.
These accounts are ideal for people who don't want to pay off their home loan so they can use the money, but who want to reduce their interest bill.
Step 7: Check with non-bank lenders mortgages
Non-bank lenders have lower overheads and their main aim is to grab market share from the big banks.
Lately, many lenders have been missing out to banks. So if you're in the market for a cheaper interest rate, check with the non-bank lenders, including building societies and credit unions.
These lenders price their variable loans to undercut the banks and they may even negotiate their advertised rates lower to win your business.
Bank lending now accounts for about 70 per cent of home loans taken by borrowers. In June 2002 the banks only held around 60 per cent of new home loan approvals. So the banks are moving onto the turf held by non-bank lenders and they aren't happy about this. So check what they can do for you.
Step 8: Reduce your mortgage loan term
When you've got a home loan, time means money. So the quicker off you pay your loan, the less interest you'll pay off.
Take two scenarios. You take a $200,000 loan over 30 years. At an interest rate of 8.07 per cent, you'll pay $331,828 in interest costs over the life of the loan if you repaid in monthly instalments. But if you repaid the loan over 20 years, you'd pay $203,585 in interest.
So that is a saving of $128,243 if you repaid your loan 10 years earlier. So if you have the funds, it's a great option and effective in reducing your borrowing costs by getting rid of it earlier.
Step 9: Know your loan costs
In today's competitive market, many lenders are waiving establishment fees on loans and other start-up fees such as valuation costs and legal fees. So ask them to waive your up-front fees and you could save hundreds of dollars.
Don't forget to ask about any ongoing fees on the loan such as monthly account keeping fees or transaction fees. Check whether early-repayment and other common fees apply such as redraw costs and break fees associated with ending the loans.
These fees aren't picked up by the loan's comparison interest rate on the loan so ask about them. And it's how the banks make money. So don't hand over your cash too freely.
Step 10: Save a bigger mortgage home loan deposit
The fact is, time is money. The more you borrow, the more you will repay in interest. So, if you are saving for your first home, save as much as you can before you buy.
Start making the sacrifices before you buy your home and get the mortgage and life will be a little easier. Make sure you claim the first home owner's grant and any other subsidies your state government offers.
Source: NewsCorp
