Investment Matters

HOW TO CUT MORTGAGE COSTS

The less interest you pay, the more you’ll have available to invest elsewhere or spend as you wish.

Over the term of an average home loan, interest charges can add up to hundreds of thousands of dollars on top of the amount borrowed. Interest on the mortgage you use to buy your primary residence is not tax deductible, it’s purely a cost. But there are ways to save tens of thousands of dollars over the life of the loan.

Check your deal
The most obvious way to lower your mortgage costs is to seek a better interest rate. To illustrate the difference, a $450,000 mortgage charging 5% would cost $419,651 in interest over a 30-year term.

Use the features
While rate is important, in some cases it might be worth opting for a mortgage with a slightly higher rate, if its features can bring other forms of savings.

Mortgages may have features that can cut costs in other areas of your budget, freeing up cash for extra repayments.

Packaging financial products, like credit cards, with your home loan can save on fees. Some loans offer access to rewards programs.

Offset accounts or line of credit loans can be used to cut interest costs by lowering the balance of the loan on which interest accrues. By holding $10,000 in an offset account against the same $450,000 mortgage discussed above charging 4.59%, you would save more than $28,000 over the loan’s term and repay the debt one year sooner.

Line of credit loans can produce similar results if you direct all of your income into the account and withdraw money only as needed.

Pay more now, less in the long run
Research from Deloitte suggests that around 75% of Australian home owners have been using the low rates to get ahead on their mortgages, saving on interest costs in the process.

Many people who have variable rate loans have got ahead by continuing to pay a constant amount off their mortgages even as interest rates were cut.

Continuing to pay the higher amount on a $450,000 loan over 30 years after a 0.25% rate cut (from 5% to 4.75% in this example) will shave almost $47,000 off the interest charged over the term of the loan.

Another approach is to pay fortnightly or weekly rather than monthly. For this to make a meaningful difference to the total interest cost, you need to pay half the monthly amount each fortnight, or one quarter of the monthly amount every week.

Considering the $450,000 home loan above again, the monthly repayments required on the loan charging 4.59% would be $2,304. By paying $1,152 each fortnight or $576 a week, you would save more than $65,500 in interest over the loan’s term and repay the debt almost four-and-a-half years sooner.

Please follow this link to the Macquarie Expertise page for the full article and expert insights.

This information is provided by Macquarie Private Bank, a division of Macquarie Bank Limited ABN 46 008 583 542 AFSL 237502. It does not take into account your objectives, financial situation or needs and you should consider if it is appropriate for you. Please contact Matthew directly at matthew.owen@macquarie.com or refer to Macquarie’s Expertise Hub for more information on the economy, investments and financial advice strategies.

Home Truths Right Team, Right Strategy, Right Result
10 March 2017

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