How to save money on your home loan

Rates and Fees verified correct on October 25th, 2016

Doing a comparison and paying attention to repayment frequency can give you significant savings on your home loan's monthly repayments

Plenty of home owners lament the amount of money they spend each month keeping up with home loan repayments. Yet, there are so many simple ways you can save money on your home loan. Even the simplest tips can save you thousands of dollars in interest over the term of your loan. You should also find that your loan term can be reduced relatively easily.

The biggest problem with most home loan tips online is that they all seem to assume that everyone has plenty of extra cash to pay into their mortgage each month. That's where these tips are a little different – you'll find plenty to help you save money, even if you're on a really tight budget.

Easy Home Loan Tips That Save You Money

Always remember to follow tips that work for your individual budget and your personal financial goals. You should also remember that there is always more than one way to save money on your home loan, so use what works for you.

Compare and Negotiate

No matter which bank your home loan is with right now, you're almost certain to find a better deal out there. Take some time to shop around and compare what other lenders are charging for their home loans.

When you've done a bit of homework, call your bank and ask them if they're able to offer you a better rate than the one you're already paying. Let them know you've shopped around and you're aware of what else is available. Then see if they're willing to negotiate for a better rate.

Even a small reduction in interest rate can save you money. For example:

Interest Rate Reduction
Loan AmountOriginal Interest Rate & Payment0.1% Discount & PaymentInterest Saved over Loan Term
$250,0006.26% - $1,540.926.16% - $1,524.69$5,842.80
$300,0006.26% - $1,849.106.16% - $1,829.63$7,011.36
$350,0006.26% - $2,157.296.16% - $2,134.57$8,179.92

As you can see from the examples above, even a small reduction in interest rate of just 0.1% can reduce your monthly repayment a little. However, it's over the entire loan term that the interest savings become apparent.

Switch Loan Type

Most banks and lenders offer more than one type of home loan product. Some will carry higher interest rates than others. Some will have package discounts available on them. Others will have additional features and products that you might be able to take advantage of.

For example: You should find that a Basic Variable home loan will offer a much lower interest rate than a Standard Variable home loan. However, there are significant differences between the features and flexibility of these loans, so be sure you're comparing the type of loan you really need. If you don't use the features attached to your current home loan now to your advantage, you might find that a Basic Variable loan will be fine for you. This can help to reduce your interest rate, reduce your monthly repayment and save you thousands over the loan term.

Small Change Adds Up

Small change

It's surprising how many people aren't aware of the difference their small change can have over the term of a home loan. For this example, we're going to add just $2.66 per week to your minimum monthly repayment. That's only $10.65 per month, so it's not going to break your budget. Yet, that small amount of money really can add up to a healthy saving overall.

For this example, your minimum monthly repayment is $1,839.35. All we're going to do is round-up your payment to $1,850. This is an easier number to remember each month anyway.

Let's see how it looks:

DescriptionLoan AmountMonthly RepaymentInterest RateInterest Paid over Loan Term
Loan Amount$300,000$1,839.356.21%$362,167.47

In this example, your spare change is capable of saving you $7,162.18 in interest charges over the term of your loan. Additionally, you'll repay your mortgage around 5 months sooner.

More Frequent Repayments

Repayment Frequency

Most people are aware that paying your home loan fortnightly or even weekly can make a big difference towards paying it off sooner. If you ask them, most people will automatically tell you it's because there are extra fortnights in a year, so you end up making an extra repayment each year.

This is correct, but is there a difference between paying fortnightly or weekly.

Let's work through this from the beginning:

Monthly vs Fortnightly Repayments

For the purpose of this example, we're going to use a mortgage amount of $300,000 at an interest rate of 6.26% over 30 years.

It is VERY important that your fortnightly payment amount is exactly half of your minimum monthly repayment for this tactic to work. Simply take your monthly payment figure and divide it by 2. Pay this amount. Don't do any other fancy calculations.

Loan AmountInterest RatePayment AmountInterest Paid over Loan TermFinal Loan Term
$300,0006.26%$1,849.10/month$365,677.1530 years
$300,0006.26$$924.55/fortnight$284,321.7624.3 years
Totals$81,355.395.7 years

So, in this example you save $81,355.39 in interest charges and you pay off your home loan 5.7 years sooner.

Let's see what happens if we increase this to weekly repayments and if it really makes any difference at all.

Monthly vs Weekly Repayments

We'll use the same figures for this mortgage example as we used in the previous one, so we really are comparing apples with apples.

Loan AmountInterest RatePayment AmountInterest Paid over Loan TermFinal Loan Term
$300,0006.26%$1,849.10/month$365,677.1530 years
$300,0006.26%$462.27/week$283,982.6224.3 years
Totals$81,694.535.7 years

In this example, all we did was divide the minimum monthly repayment amount by 4 and then pay that amount every week. The difference in interest saving for this example was only $339.14 less than the amount you would save by paying fortnightly.

However, both options allow you to save far more money than if you continued to pay your home loan monthly.

100% Offset Account

If you're the type of person who tends to keep money in savings, you should be taking advantage of a 100% offset account linked to your mortgage. Essentially, every dollar you keep in savings within your offset account reduces the amount of interest you pay on your home loan overall.

For example: if you have a mortgage of $300,000 and you have $10,000 in your offset account, you will only be paying interest on $290,000.

Your repayments are calculated to contain a portion to cover the interest due and a portion to pay down your principal balance. By reducing the amount you pay in interest, this automatically increases the amount you pay off your balance each month.

The actual amount of money you can save by keeping your savings in an offset account will depend heavily on how much you leave in there at any time.

Information on Offset accounts

Mix and Match

The best part about these tips is that you're able to mix and match them to suit your own budget and your own pay schedule.

Let's look at what happens if we put all of these tips together all at once. We're going to make weekly payments. We're going to round up the payment made to the nearest $10 per week. We're going to negotiate for a 0.1% reduction on the interest rate paid on the home loan.

Putting all of these tips together will give you the following:

Loan AmountInterest RatePayment AmountInterest Paid over Loan TermFinal Loan Term
Original Loan$300,0006.26%$1,849.10/month$365,677.1530 years
Amended Loan$300,0006.16%$470/week$260,204.6622.9 years
Totals$105,472.497.1 years

In this example, we only increased the weekly payment due by around $ 7.73 each week, so it's still not enough to break the budget ($462.27 + $7.73 = $470). We also managed to negotiate a very small reduction in the interest rate of just 0.10%. These are such tiny changes to your existing home loan.

However, the results show that you'll pay off your home loan in around 22.9 years, which is 7.1 years sooner. You'll also save a massive $105,472.49 in interest charges over that time.

Now, that's REALLY saving money on your home loan.

Marc Terrano

A passionate publisher who loves to tell a story. Learning and teaching personal finance is his main lot at Talk to him to find out more about home loans.

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