If you already own a house, there are plenty of reasons why you might...Read More →
Home – where foundations are set, families are built, stories begin and memories live on. It’s what many of us dream of – a comfortable place to call our own.
Sentimentality aside, a home is also probably THE MOST EXPENSIVE THING YOU’LL EVER BUY. At a median value of around $550,000, dwellings in Australia require a fair chunk of dough to be cooked up by the everyday punter. Unless you’re flooded with cash, most of this will need to be borrowed through a home loan (otherwise referred to as a mortgage).
Repaying this home loan can feel like ‘forced savings’, with money put towards the home as ‘equity’ to solidify it as the bedrock of your household’s finances. In that sense, paying off your property – an asset which can grow in value – could be seen as an ‘investment’ rather than a ‘cost’. But a scoop of your repayments are fed to the lender in interest. Over the life of the loan, this interest can knock you for six in cost figures.
For example, a $400,000 home loan at a 4% interest rate over 25 years could set you back over $200,000 in interest. See for yourself with our mortgage repayment calculator.
So as your biggest expense, your home loan should be one of the first places to hunt for savings.
At Savings.com.au, our practical savings advice can help you here – be it by helping you pick a good value home loan to help you purchase a house or unit, or by guiding you toward opportunities to save on your current home loan through different options to refinance.
To know how to save on a home loan, you need to identify where the costs are coming from. Essentially, you’ve got two main sources:
Interest rate: The ultimate money-muncher, interest makes up the majority of the home loan’s total cost.
Fees: While not as significant as interest costs, the upfront and ongoing fees of a home loan can stack up in the thousands over the life of a loan. These home loan costs can include application fees, discharge fees, lenders mortgage insurance premiums and annual fees.
Luckily, Australia’s competitive home loan market provides Aussie borrowers with ample opportunities to save on these costs by simply comparing home loans to find some of the best value deals. Whether you’re looking to save on a new home loan or your existing one, there are market-leading products available in today’s low-rate environment with comparison rates of under 4.00% p.a. Every basis point (0.01%) of difference between rates could save thousands off the total cost of your home loan. In fact, a quick scan of the market right now (August 2018) shows a difference of more than 250bps (basis points – which is equivalent to 2.5%p.a) from the lowest to the highest rates available in the basic variable owner-occupier market. That difference would represent around $8,000 a year more in interest payments on the average Australian home loan of nearly $400,000.
While securing a great deal on a home loan is the crucial part of the equation, there still are other things you can do to save money on your home loan, such as:
Not only can these methods reduce costs, but they may also help you pay off the loan earlier, granting you more years of debt-free freedom.
Are you familiar with the different types of home loans? If not, read on to gain a better understanding so you can shop for home loans with confidence.
Owner-occupier home loans (OO) are for borrowers that will be living in (occupying) the property for which the home loan is being used to buy.
Investor home loans (Inv) are for…yep, property investors. These borrowers purchase the property with the help of an investor home loan and rent it out in the hope of attaining an investment return and/or an income stream. Generally, investor home loans have higher interest rates and stricter eligibility requirements than owner-occupier home loans.
Variable rate home loans have an interest rate which can fluctuate over time – typically in line with the Reserve Bank of Australia’s (RBA) official cash rate. Lenders can also make changes to the interest rate independently of the cash rate – known as out-of-cycle rate movements. Most home loans in Australia have a variable interest rate.
Depending on the product, a variable rate home loan can be very flexible. Borrowers often have the option of making repayments on a weekly, fortnightly or monthly basis.
Fixed rate home loans have an interest rate that is ‘fixed’ for a set period of time – often between one to five years. This means the rate is guaranteed to remain at the agreed rate over that period. Borrowers who think variable interest rates will rise in the near future may consider taking out a fixed rate home loan to save on interest costs. This can be a calculated gamble, since variable interest rates can go up or down. Fixed rate lenders typically price possible future rate rises into the fixed interest rates they offer, so fixed rate home loans quite often have a higher rate than variable rate home loans.
For budget-conscious households, fixed rate home loans can offer the peace of mind in knowing that repayment requirements will remain consistent over the set period.
Split home loans are a combination mortgage where a part of the outstanding loan is charged at a variable interest rate and the other part is on a fixed rate for a set period of time. For those that can’t choose between a variable or fixed rate home loan, a split rate essentially provides an opportunity to hedge your bets on variable rates rising or falling.
An interest-only home loan (IO) allows the borrower to delay the repayment of the loaned amount (the ‘principal’) and only pay the interest on the loan for a set period of time, typically 1-5 years before it reverts to a standard principal and interest home loan (P&I). This type of loan is popular with investors, who can claim a tax deduction on interest payments. Interest-only home loans have a higher total cost than principal and interest home loans (even if they have the same interest rate and home loan term – which they typically don’t) because the loan’s principal remains the same over the interest-only period – attracting more interest costs.
A construction home loan is a mortgage you take out when you are either building a new home or you are doing a major renovation. Most lenders have construction loans available at slightly higher rates of interest, so it is very important to compare interest rates and associated fees across all construction loans to make sure you are getting a good deal.
A line of credit home loan is a loan that is borrowed against the equity of your home. It provides you with the ability and the flexibility to access the loan when you need it. This is a loan that is set up against a home that you already own. It basically allows you to pay back what you have put in.
Reverse mortgages are designed for asset-rich, cash-poor people (often aged over 60) who want to remain in their home while still having enough money to live on. Reverse mortgages allow these people to access the equity in their home. Borrowers of these home loans do not have to make repayments while living on the property, but like any loan, interest is charged on the balance. When the borrower sells the home or passes away, the loan needs to be repaid in full, including interest.
Offset accounts are like savings accounts where the money stored in the account is offset against the balance of your home loan when interest is charged. This means you’re not charged interest on the full actual balance of your loan, saving you in interest costs. Offset accounts can be full (100%) or partial offset. On a full offset account, 100% of the funds in the account are deducted from the outstanding loan balance when interest is calculated. For instance, if you have a $200,000 mortgage and $20,000 on the offset account, you will only be charged interest on $180,000 each month. For a partial offset account, only some of the offset account balance is deducted from the outstanding loan balance. So assuming the same amounts from the previous example, a 50% partial offset account would charge interest on $190,000 each month.
A redraw facility allows borrowers to make extra repayments on their home loan which they can ‘redraw’ later if required. It allows you to be flexible when repaying your loan. This is particularly useful if you have savings now that you want to put towards your loan, but you know that have an expense coming up in the future where that cash is required. Sounds similar to an offset account, doesn’t it? The main difference between redraw facilities and offset accounts is the availability of the funds. Money in an offset account can usually be withdrawn at any time (offset accounts sometimes come with an EFTPOS card to allow this), whereas redraw facilities often do not provide same-day withdrawal.
Comparison is key to making the right choice of home loan. Compare everything from the different types of home loans, lenders, home loan rates and fees. A thorough home loan comparison can give you a huge advantage in the mission to land a great value mortgage that satisfies your requirements.
When it comes to applying for a home loan, you will need to provide the lender with a number of different financial documents. Having these documents prepared will shorten the application period.
So, do your research and find out what exactly are you expected to bring. Bank accounts, brokerage statements, payslips – having these ready beforehand them can save you a lot of trouble.
It goes without saying that it is only advisable to borrow as much as you know you can afford to repay. It might seem obvious, but many Australians make a fatal mistake when it comes to this, leading to years of ‘mortgage stress’. Just because a lender is willing to lend you up to a maximum amount does not mean you should borrow at that max. So be realistic. Know exactly what you can afford and do not compromise your home by borrowing more than that! Use a mortgage repayment calculator to help you estimate what your monthly repayments will be.
It is okay to be confused. So, if you don’t know exactly which loan features are right for your particular circumstances, be as clear as possible with your lender or mortgage broker when discussing what you’re trying to achieve, to allow them to help match you to the right loan to meet your needs. These people deal with lending every day, so do not be afraid to talk to them and ask them for help. Most of the time, apart from advising you, they will be more than willing to assist you in preparing and submitting all the paperwork.
Don’t rush into the decision, take your time, do a thorough lender and home loan interest rate comparison, ask around, get your financial documents in order and ask for help if needed! This decision would probably be one of the most important ones in your life, so do not take it lightly!
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