Hacks to help Aussies get their home loans down, as interest rates shoot up

As the Reserve Bank weighs up the first cash rate rise of 2023, Compare Club’s brokers suggest the average Aussie mortgage holder could reduce their interest repayments by an average $354 a month and could cut an average of $90,296 from total loan repayments – potentially shaving 3 years and 9 months off the loan. Whether or not the cash rate goes up again, around 800,000 Aussies will be coming off low fixed rate loans this year.

How can Aussies stay on top of their home loans?

The good news, according to personal finance marketplace and advice company Compare Club, is that there are some home loan hacks that can help Australians pay down their mortgages sooner and save them a tonne of interest. No matter what stage you’re at with your home loan, there are tactics you can employ to help your cash flow and make savings. Even if it’s just asking your bank for a better rate, it pays to be proactive.

Make fortnightly repayments instead of monthly

Making payments more frequently uses the power of compounding interest in your favour, knocking 3-5 years off your loan. Using a $600,000 mortgage paying principal and interest over 25 years at a rate of 5.6% as an example, fortnightly repayments reduces the length of the loan by 3 years and 9 months, saving more than $90,000 in interest.

Repayments Total Interest Charged Total loan repayments
Fortnightly $1,860 $425,837 $1,025,837
Monthly $3,721 $516,133 $1,116,133
Savings -$3,708 $90,296 $90,296

$3,708 is how much extra would be paid off the principal loan if paying fortnightly compared to monthly *Figures are based on the averages on a $600k principal and interest loan with 5.6% interest, paid over 25 years.

Paying down your principal loan faster, you’ll be charged less interest because interest is calculated daily but deducted monthly, so you’ll knock more off your principal loan amount.

Everybody’s situation is different, but we speak to homeowners every day who aren’t aware that even the simple act of switching to fortnightly repayments could cut upwards of $300 a month from their mortgage costs. With homeowners really feeling the squeeze in 2023 we wanted to highlight some simple ways to save money by being smart with their loan.

Play to your strengths

If you’re a good saver and don’t spend your entire paycheck every week, an offset account can help you save on interest. If you can afford to save but aren’t super disciplined, get a home loan with a redraw facility. An offset account sits alongside your home loan; but the balance is deducted from your loan amount when the bank calculates the interest.

This means lower monthly repayments for you. Even just $10k in an offset account can shave around $8,500 off your interest repayments over the course of a 25 year, $600k loan. An offset account works almost exactly like a typical savings account so the finances are easily accessible and can be connected to your debit card for easy spending.

So if you’re disciplined in keeping your salary and savings in your account for as long as possible, this is convenient and helping you reduce the interest charged on your home loan.

A redraw makes it a little harder to access your money and can come with fees or limits, so if you need some help keeping your savings stable, while also reducing the amount of interest you’re charged, a redraw facility is better suited to your needs.

Let’s take a $600k mortgage paying principal and interest over 25 years at a rate of 4.46% as an example – no offset or redraw requires $3,322 in monthly repayments while having $50k in an offset or redraw account reduces those repayments to $3,045, saving $33,036 over the lifetime of the loan and allows you to pay your mortgage off years sooner.

Use your credit card cleverly with home loan

This is the neat little trick for disciplined spenders that banks don’t want you to know about because it can cut your interest charges greatly. Remember how we said that interest is charged daily but deducted monthly? Well, if you get paid into your offset account on the 1st of the month, then use a credit card to pay all your expenses for the month without touching your account, the interest is calculated on your loan balance minus your salary.

You’d need to have a credit card with a good interest free period, like 55 days or more For this to be effective, you need to pay your credit card bill balance off in full at the end of every month, right before your next salary deposit. This trick keeps your offset account at a maximum balance for as long as possible, minimising interest charges on your principal loan amount. This gets your loan paid down quicker, shaving years off the life of your loan.

Ensure any overpayments go towards your principal mortgage

Making any extra repayments might seem like a pipe dream, but it is one worth looking into. Many banks have home loans on a default system whereby any overpayments go towards interest, so if you ever get a tax refund, a bonus or decide to put more payments into your loan, call the bank before making the deposit to ensure it comes off the principal.

Check your home loan statement to ensure that your overpayments go towards your principal, as this should be part of your loan contract. Just this one step could save you a lot of money in the long run and for not a lot of effort. For example, if someone currently paying $3,322 p/month on a principal and interest loan of $600k over 25 years based on 4.46% interest started making repayments as though their interest was 5.6%.

Their repayments would be $3,721 p/month, contributing an extra $399 p/month towards their principal which would save them $79,006 in interest and pay the loan off 4 years and 5 months sooner. For more information visit compareclub.com.au.

Sophie Matthews is a Mortgage Home Loans Expert at Compare Club.