Saving Interest on Your Mortgage - Smart Tips, Tricks and Strategies for the Australian Homeowner!
For most of us, our mortgage payments are one of our biggest financial commitment. Every month, a significant chunk of our hard-earned income goes towards paying off our loans, with a large portion of that being interest going straight into the bank's profits.
Interest rate rises can have had a huge impact on the monthly budget putting pressure, not just on personal finances,
but relationships and the whole household. But what if you could do something about it and start saving thousands in interest with just a few small changes and using some of the smart tools available?
In this article I am going to touch on some of the best ways to save interest, the huge benefits your will see as the interest savings pile up and also review some of the risks that come from trying to pay off a mortgage sooner. So if you are ready to take control of your mortgage and save thousands in interest charges, let's jump in!
Top 9 Tips to Save Interest on Your Mortgage
We'll kick things off with a quick list of the
tips to help save interest on your mortgage and debts.
Mortgages, loans and debts come is all shapes and sizes and each bank likes to apply their own rules, so you will need to pick and choose the
interest savings tips that apply to you. If in doubt talk to a financial advisor to discuss the best strategy for your specific financial situation.
#1 Interest Saver Tip - Make Extra Repayments
Every additional dollar thrown at your mortgage goes straight towards the principal, reducing the amount you owe interest on. This can be done through regular monthly contributions or even one-off lump sums from tax refunds or bonuses. Use one of the cool apps out there to see in real-time how much difference it will actually make to help motivate you. If you are in Australia the
Australian Mortgage and Personal Finance App MoneyFormula has some pretty cool tools to crush your mortgage.
#2 Interest Saver Tip - Switch to Fortnightly Repayments
By splitting your monthly repayments into fortnights, you effectively make one extra payment per year. This small adjustment is simple to make and can add up to significant interest savings over the loan term.
#3 Interest Saver Tip - Renegotiate Your Interest Rate
Don't be afraid to talk to your current lender and see if they can offer you a better interest rate. This one phone call can save you thousands in interest over the life of your loan. Loyalty doesn't always pay off, so be prepared to walk away if a more competitive offer exists elsewhere. But remember, it's not just the interest you save that is important, make sure you also check the fine print to see you are getting a similar product.
#4 Interest Saver Tip - Consider Refinancing
Researching the market for a lower interest rate with another lender can save you thousands in interest. However, remember to factor in any exit fees from your current lender before making the switch because large penalties can undo any potential interest savings.
#5 Interest Saver Tip - Set up an Offset Account
Link an offset account to your mortgage where your everyday savings are held. The balance in this account reduces the amount your loan is calculated on, effectively lowering the interest you pay. However, check that your lender doesn't charge you too much extra for the offset, because unless you have a large rolling balance the fees can outweigh the benefits.
#6 Interest Saver Tip - Improve Your Loan-to-Value Ratio
The lower your LVR (ratio of loan value to property value), the better interest rate you'll typically qualify for. Making additional repayments can improve your LVR over time then shop around and see if you can get a better interest rate.
#7 Interest Saver Tip - Explore Fixed-Rate vs Variable-Rate Options
Fixed rates offer stability, while variable rates can fluctuate. Consider your risk tolerance and future interest rate predictions when choosing.
#8 Interest Saver Tip - Consolidate Debts
High-interest debts can significantly impact your finances. Consider consolidating them into your mortgage (if possible) to free up cash flow and potentially lower your overall interest burden, saving you thousands in interest. However, be careful if you are consolidating bad debt (credit cards, by now pay later, store credit, etc.) to save on interest, that you cancel these bad debt facilities so that you can't keep using them to wrack up more debt.
#9 Interest Saver Tip - Set up a Plan to Crush Your Mortgage
Mortgages take a long time to pay off and we all fall into the trap of just following the bank's repayment schedule. We simple keep repaying the amount the banks tell us to pay and help boost their profits. Use one of the mortgage planning apps to set up a simple goal to crush your mortgage and you will be amazed how much you can save. Having a plan and seeing your interest savings makes it much easier to stick to.
If you are in Australia the
Australian Mortgage and Personal Finance App MoneyFormula has a greate Debt Crusher to target mortgages and all other bad debts. It will instantly show you how much interest your will save compared to the bank's way of doing things!
Enjoy the Benefits of Saving Interest on Your Mortgage
While we all know it would be great to save thousands in interest it important to understand some of the extra benefits you will get as well as the cold hard cash, which can be a great motivator to help keep you on track to saving thousands as chip away at your long-term debt.
Slash Your Interest Costs
Ok, let's start with obvious one and the most compelling reason - significantly reducing the total interest you pay over the life of your loan will save you thousands of dollars. Early repayment translates to a smaller loan balance, meaning less money goes towards interest charges and more towards actually owning your home.
Accelerate Your Equity
Every additional dollar you throw towards the principal reduces your loan amount faster, accelerating your equity growth in the property. This not only strengthens your financial security but also frees up potential borrowing power for renovations or future investments, all thanks to the interest you've saved.
Free Up Cash Flow for Future Savings
Owning your home outright eliminates the monthly mortgage repayment burden. Not only is this a massive saving in interest payments each month it also frees up significant cash flow that you can then direct towards the cost of living and other financial goals, like saving for retirement or that dream holiday.
Improve Your Borrowing Power
The equity you build by saving interest on your mortgage repayments translates to a better credit score and stronger financial standing. This improved borrowing power can give you access to better interest rates on future loans.
Interest-Free Living
Once your mortgage is paid off, you no longer have to worry about interest rate fluctuations impacting your monthly outgoings. Not only are your saving thousands in interest but you don't have that constant worry of what the bank could do to your repayments. Your housing costs become more predictable, freeing up mental space and allowing for better financial planning, all thanks to the extra repayments and the interest you've saved.
Peace of Mind Worth Its Weight in Saved Interest
The financial security and emotional well-being gained from knowing your home is yours free and clear can be immense. It reduces stress and allows you to focus on other aspects of life.
Work Less or Retire Early
The financial freedom gained from a paid-off home, with no more mortgage interest to worry about, can provide the flexibility to consider working less or early retirement without the burden of ongoing housing costs.
Leave a Lasting Legacy
A paid-off home can be a valuable inheritance for future generations, saving them from the burden of a mortgage and years of interest payments. This gift is a direct result of your commitment to making extra repayments and saving interest on your own mortgage.
Security During Economic Downturns (and Pandemics!)
Owning your home outright provides a sense of security during economic downturns. You won't risk losing your home due to job loss or an inability to make repayments and you will always have somewhere safe to call home.
Sense of Accomplishment
Reaching the milestone of a paid-off mortgage is a significant financial achievement and brings a great sense of accomplishment and pride in homeownership.
Avoid the Top 7 Risks When Trying to Save Interest on Your Mortgage
Ok, so you've gone through the list of tips and picked a couple of winners, you've read through the benefits of saving interest
and paying off debt and you are all motivated to crush our debt.
But first, before you charge off, let's touch on a few of the
risks you could face while trying to save interest, so things don't suddenly go wrong for you on your path to success.
#1 Interest Saver Risk - Reduced Liquidity
Extra repayments directed towards your mortgage mean less readily available cash for emergencies, unexpected expenses, or opportunities that might arise. Look into a redraw facility on the mortgage so that any interest saved and extra repayments made can be withdrawn if required.
#2 Interest Saver Risk - Neglecting Other Debts
Focusing solely on the mortgage might leave high-interest debts like credit cards or personal loans neglected. Prioritise paying off these debts first to free up cash flow in the long run. If you are using the
Australian Mortgage and Personal Finance App MoneyFormula take look at the wealth goals and debt snowballing which are a great way to handle this a save thousands in interest.
#3 Interest Saver Risk - Missed Investment Opportunities
The potential return on investments might exceed the interest saved on your mortgage. Forgoing these opportunities to prioritise mortgage repayment could limit your overall wealth creation. However, you can use the equity you build up in your property as deposits on other investments, but always make sure you have the cash flow to cover all financial commitments.
#4 Interest Saver Risk - Impacting Other Savings Goals
Aggressive mortgage repayments might delay achieving short-term financial goals like saving for a holiday or a new car. Find a balance between the two so that it works for you over the long-term, saving interest and having fun.
#5 Interest Saver Risk - Unforeseen Life Events
Unexpected job loss, illness, or major repairs could strain finances if most disposable income is directed towards the mortgage.
#6 Interest Saver Risk - Limited Flexibility
A large portion of your income tied to mortgage repayments reduces your flexibility to adjust your lifestyle or adapt to changing circumstances.
#7 Interest Saver Risk - Quality of Life
If every spare dollar goes on paying down debt it can put a burden on your household and relationship if life goes on hold. It's really important to add in a bit of fun along the way so that you can enjoy life and reach your long-terms goals.
The Easy Way to Save Interest on Your Mortgage & Debts!
Now that we've covered the basics on
how to save interest on your mortgage and debts it's time to take action. One of the best ways forward is to plug your debts into the one of the smart apps available and find out how much you can save.
The right personal finance app will instantly show you what it will take to crush your debt, let you scenario plan, apply different debt strategies and ultimately help you lock in your target in a way that is realistic and affordable.
Like everything in life there are plenty of options out there so shop around and try them out until your find one that suits you.
As an example here is how the
Australian Mortgage and Personal Finance App MoneyFormula can help you save interest on your debts.
MoneyFormula App - Scenario Plan and Identify Savings
Use the mortgage planning reports to check the impact of interest rate rises, extra repayments and discover how to lock in a mortgage free date.
MoneyFormula App - Set a Goal to Crush Your Mortgage
Without doubt some of the biggest interest savings come from paying down your mortgage. It is really important that the mortgage app lest you lock in a mortgage free date and see what it will take and how much interest you will save. Or the mortgage app should have the ability to lock in an additional repayment amount and see when you will be debt free and how much interest you will save.
MoneyFormula App - Set a Goal to Crush All Bad Debts
While you can save the most interest on your mortgage over the long-term, bad debts (like credit cards, store credit, car loans, etc.) often carry much higher interest rates and can do a lot interest damage in the short term. A mortgage and personal finance app should give you the tools to lock in all your bad debt, apply an extra repayment amount and then for bonus points, it should also let you snowball the minimum repayments from one debt to the next maximising the interest you can save.
MoneyFormula App - Apply Different Debt Strategies
When paying down bad debts there are three common strategies you can apply, which are "debt snowball" where you pay down the smallest balance first, "debt avalanche" where you pay the largest interest rate first and "custom order" what you choose the debt you want to pay off first (for example, a debt that stresses you the most and you just want gone). A personal finance app should let you choose the strategy and apply it to your debts so you can instantly see which is better for you.
MoneyFormula App - Track All of Your Debt
Storing all of your debts and mortgage in the one convenient location makes it easier to control your debt and save on interest. You can view and search all of your transactions, view recent interest charges and get summaries across all of your debts, which is so much better than having to log into each lender's solution to check each debt.
MoneyFormula App - Debt Profile
Different debt should be handled differently so it is really important to identify your debt types. The personal finance app should instantly group all of your debt under the correct categories include Bad Debt, Your Mortgage, Investment Loans and Other Debts so you can automatically apply different debt strategies and different priorities to the debts.
MoneyFormula App - Net Worth
It is really motivating to be able to track your progress and a Net Worth view that compares everything your own (your assets) and everything your owe (your debts) is a great tool for this. The personal finance app should be able to summarise up everything you own and owe and let your track your progress as you pay down debt and save interest.
Saving Interest on Your Mortgage - What Next?
PLEASE NOTE: The information in this article is general in nature. It does not take into account your personal objectives, financial situation or needs. Please speak to a qualified financial adviser if you need specific advice on your finances.
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