Buying a home is a major financial commitment. Here are seven ways you can save an enormous amount of money on your mortgage.
1. Beware of honeymoon rates
Many lenders offer special introductory rates to get you in the door. But after the honeymoon period is over, the lender will hit you with a variable rate that is higher than what you would have paid for if you took out a basic loan. This variable rate will determine how much you will pay in the next 20 years so be mindful of that.
Another issue with honeymoon rates is that they strictly apply to the first two years of the loan. If you want to refinance your loan during this period, the lender might charge you with steep penalties.
2. Do not drag it out
Time is money, so pay your loan off as soon as you can. If you take out a loan of $400,000 at 5 percent for 25 years, your total repayment would be $701,508. If you take out the same loan but pay 10 years rather than 25, your total repayment would amount to just $509,114.
One way you can speed up the term of your loan is to pay fortnightly rather than monthly. The simple explanation for this is that there are 26 fortnights in a year as compared to only 12 months. Paying fortnightly gives you an extra payment period, so you essentially make 13 monthly payments every year. This could make a big difference in the number of years of your loan.
3. Pay a higher rate
Taking out a loan at the lowest interest rate and paying it at a higher rate could help you fulfil your mortgage commitment faster. For example, get a loan with a 4 percent interest rate and pay it off at 5 or 6 percent. The slight increase represents a small amount that you would hardly notice, but you’ll be paying off your loan quicker this way.
4. Cover the principal early
Compound interest sometimes makes you feel that you are only paying for interest without making a dent on the principal. Every chance you get, try to put extra money into your mortgage in addition to your regular repayment to cut into the principal.
5. Consolidate all your debts under your home loan
Interest rates on credit cards and personal loans are typically much higher than interest rates on a home loan. One way to protect yourself from rising interest rates is to put all your debt under one roof – specifically your home loan. This way, your credit card or personal loan with 15 to 20 percent interest would only be around 5 percent.
6. Adjust your lifestyle
If you plan to buy a house, be prepared to make adjustments to your luxurious lifestyle. Cut back on coffee and save $5. Give up smoking for an extra $10. Cook at home rather than eat out to get another $12. Stay in and read a book instead of going to happy hour means $8 more in savings. All these add up to around $9000 a year that could go into your mortgage repayment.
7. Create an offset account
An offset account is a savings account that is linked to your home loan where any interest earned goes directly into your mortgage. If you put your income into an offset account, it will earn more interest and therefore reduce the balance of your loan.