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Buying a house is a significant financial commitment. Here are seven methods to save money on your mortgage.
Buying a home is one of the most significant financial investments most Australians will make in their lives. From saving for a down payment to making monthly mortgage payments, it’s a commitment that can take decades to achieve.
When it comes to repayments, far too many people make basic mistakes. These errors, no matter how minor, might end up costing you a lot of money over the life of your loan.
So, let us share with you these tips to hopefully help you avoid mistakes, minimise risks, and, best of all, save money on your mortgage.
1. Be aware of the introductory phase.
To get you in the door, several lenders offer special introductory rates. However, after the promotional period, the lender will charge you a greater variable rate than the rate you would have paid if you had taken a basic loan. Be mindful that this variable rate will decide how much you will pay in the following 20 years.
Another disadvantage of introductory period rates is that they are only valid for the first two years of the loan. If you seek to refinance your loan during this time, you may face hefty penalties from the lender.
2. Do not drag it on.
Pay off your debt as quickly as possible. If you borrow $400,000 for 25 years at 5% interest, your total repayment will be $701,508. If you took out the same loan but paid it off over 10 years instead of 25, your total repayment would be merely $509,114.
Paying fortnightly rather than monthly might help you shorten the duration of your loan. The simple explanation is that a year is divided into 26 fortnights rather than simply 12 months. Paying fortnightly adds one extra payment period to your year, resulting in 13 monthly payments. This might have a significant impact on the length of your loan.
For example, if you borrow $180,000 at 3.77 percent interest, you’ll end up paying more than $120,000 in interest throughout the loan. At 3.25 percent, you’ll spend more than $40,000 in interest on a 15-year mortgage, which generally has a lower interest rate but somewhat higher monthly payments. This equates to an $80,000 save.
3. Pay a higher rate.
Many homebuyers select a fixed-rate mortgage with a 30-year duration, which often includes cheaper monthly payments than a loan with a shorter period. A 15-year or shorter-term mortgage, on the other hand, will save you a lot of money and help you pay off your mortgage faster.
4. Make additional monthly payments to principal amount.
Compound interest might give the impression that you’re simply paying interest and not making any progress on the principal. Try making extra payments straight to the loan principal each month. You may save thousands of dollars on your home loan and pay it off sooner.
5. Consolidate all your debt under your home loan.
Credit card and personal loan interest rates are generally significantly higher than home loan interest rates. Putting all of your debt under one roof – especially your home loan – is one method to protect yourself from rising interest rates. Your credit card or personal loan with 15% to 20% interest would only be approximately 5% if you did it this way.
6. Make the necessary adjustments in your spending.
How you manage to make advance payments and bigger payments to your loan also depends on some extra cash you get to save by avoiding or reducing some expenses. If you think these “minor expenses” are harmless, you’ll be surprised at how much you will be able to set aside if you make a few “adjustments”. Save $5 by reducing your coffee consumption. For an additional $30, quit smoking. Cook at home instead of eating out to save $20. Staying at home and reading a book instead of going to happy hour saves you $8. All of these adds up to about $9,000 each year that might be used to pay down your home.
7. Create an offset account.
An offset account is a savings account connected to your mortgage, with any interest generated going straight into your debt. If you deposit your earnings into an offset account, it will generate higher interest, lowering your loan balance.
Keep in mind that real estate is an asset that grows in value over time. Even if you have to borrow money to buy a house, as long as you have a good strategy, this is helpful to you in the long run.