You’ve put in the hard yards, worked hard to save a deposit, and you’ve just bought your home. With the home has come a home loan.
A home loan usually involves a lot of money, and you can be sure that you want to pay it down as quickly as possible. I’ve provided some handy tips to save on your loan, help you own your home outright and living that stress free life before you know it.
Look for the lowest interest rate
I’ve started with a simple but effective tip: Try to get the lowest interest rate possible. While this may sound obvious, many people don’t recognise the impact your interest rate can have over the life of a 30 year loan.
Let’s look at a typical $500,000 loan, and two interest rates of 4.00% and 4.40%. In the first case, you are paying interest across the life of the loan of $359,347. With the higher rate, you are now paying interest of $401,369. That is a difference of $42,022. Fancy a boat? Because you can buy a very nice boat with $42,022.
This doesn’t have to be when you first get the loan
While it is ideal that you get the lowest rate from the start, sometimes that isn’t an option. If you’re a first home buyer, your deposit might limit you to certain lenders or products which might not have the best rates.
The trick is to constantly review your rate. While six months may be too often to check (unless you’re very serious about saving money), it’s good to continually try and compare with other lenders. Once a year, call your broker and ask them to either check if you can get a better rate with your lender, or look at a full refinance if your lender won’t reward your loyalty.
Save with an offset account..
Offset accounts are wonderful things. In the dark old days, you used to have to transfer any spare money into your loan account to try and reduce the interest you were paying. These days, you can simply have an everyday account that saves you paying interest at the same time.
For those who aren’t familiar, any funds that are in an offset account are used to offset your home loan. Put simply, if you have $1,000 in your offset account, it will save you paying interest on $1,000 on your home loan at 4% rather than generating interest in a savings account at 2%.
A couple of things to note here. Despite common belief, if you have funds in your offset account, it won’t reduce your principal and interest repayments. Rather, it will mean more of your repayments go towards paying the principal down. In turn, this means a shorter loan term and less interest paid overall. Get your wages paid directly into your offset account and you are laughing!
…or five offset accounts
Why have one offset account when you can have five?
This is where we start to get into the really good stuff. A lot of very smart people prefer to have multiple banking accounts. The first will be an everyday account, the second will be for school fees, the third for additional savings. Maybe one for him and one for her.
Some banks have started to realise this and now allow you to have multiple offset accounts. All the funds in each account are still working to save you paying interest on your home loan but now you can organise them to make sure you have the funds ready to pay those pesky school fees.
There you have it.. how to manage your money and save interest and time on your home loan like a pro. Keep up to date with these tips and you’ll own that boat in no time!
To run through these in more detail or review your current home loan rates, don’t hesitate to give Entourage Finance a call on 03 9421 1651.
By Vincent Moore.