Getting a mortgage is one of the biggest financial decisions you will make in your life, as for most people it is your single biggest loan, and the repayment terms are normally for 25 to 30 years. Yet, many people spend more time researching their new mobile phone purchase than what mortgage they should get.
Mortgages involve large sums of money, so you must thoroughly evaluate the terms and conditions of the loan contract before signing up. Your mortgage consists of:
- principal – the amount you borrowed to buy your home
- interest – the amount you pay your lender and
- fees for arranging and having the mortgage facility
If you ignore seemingly small terms in your mortgage contract, it can cost you a lot of money. For example, if your mortgage has an interest rate that is even slightly above the market rate, you are likely to end up paying a significant amount of money in interest over the term of the mortgage because you are borrowing over such long periods of time.
For example, a standard variable 25-year loan of $500,000 at 3.65% interest would cost $763,056 in principal and interest. A similar loan at 4.65% interest would cost $846,571. That 1% difference in interest rate equals $83,515 over the term of the loan – which is a lot of smashed avo!
Thankfully, there are many ways to get the most out of your existing mortgage or to secure the best mortgage deal. In this blog post, we mention some useful tips that should lower your mortgage repayments and help you save plenty of money. Read on to find out.
What is a Comparison rate?
A comparison rate includes the interest rate as well as certain fees and charges relating to a loan. The aim of the comparison rate is to help you identify the true cost of a loan and compare loans and services offered by financial institutions and mortgage providers.
1. Use a Mortgage offset account
Consider using a mortgage offset account as your everyday bank account and or establishing an offset account for any savings you may have. An offset account is a savings or transactional account linked to your mortgage account. It can help you pay less interest because, every day, the money in your offset account is offset from the outstanding balance of your mortgage before the interest is calculated. This means that interest is charged on the mortgage outstanding amount minus the balance in the offset account. For example, if you have a $500,000 outstanding balance in your mortgage and you have $50,000 in your mortgage offset account, you will be charged interest on $450,000 ($500,000 – $50,000). This reduces the interest you will be charged and helps you pay of your mortgage more quickly.
2. Negotiate for lower intrest rates with your lender
If you have already entered into a mortgage contract with a lender and the interest rates in the market fall, you should negotiate with your lender to revise your interest rate as well. Compare interest rates on similar loans and if you find a better rate ask your current lender to match it or offer a better deal. If your lender is offering lower interest rates to its new customers, you too can ask them to lower your interest rate. Some lenders will agree to lower the rates without refinancing, provided you have a solid history of repaying your mortgage on time, a good credit score and have more than 20% equity in the house. If your lender is unwilling to offer you a lower rate don’t be afraid to move elsewhere, where you may be offered more competitive interest rates and better overall mortgage packages.
3. Improve your credit score
A good credit score can brighten your chances of getting a mortgage at lower rates in comparison with the market rates. Lower interest rates will have a large impact on the total interest payments over the term of the mortgage, saving you a significant amount of money. If you don’t have a good credit score, you should take steps to improve it as it can easily get you a mortgage at affordable rates with reduced mortgage repayments. Contact Fix Bad Credit if you would like more information on improving your credit score.
4. Calculate whether a fixed, variable, or split-rate loan reduces your repayments
You have plenty of options when applying for a mortgage; you can opt for a mortgage with a fixed interest rate, variable interest rates, or a split-rate (adjustable) rate. Depending on your situation and the interest rate environment, you need to calculate which option would give you the maximum benefit in terms of lowering your interest costs and periodic mortgage payments.
Fixed-rate mortgages typically involve higher interest charges but give you the luxury to pay fixed charges irrespective of the market movement in interest rates. You can also plan for your repayments as they don’t change due to variation in the market interest rates. However, the downside to fixed-rate mortgages is that you’ll have to pay the higher rate even if the market rates drop, in which case, you might have to consider refinancing.
Variable-rate mortgages are quite common and the interest rate on them changes with the change in market interest rates. When the market interest rates fall, the interest rate on your mortgage also falls, which can reduce your repayments on variable rate mortgages.
Split or adjustable-rate mortgages are a combination of fixed and variable rate mortgages. They allow you to divide your total loan into fixed and variable parts. For example, if your total mortgage is worth $500,000 and you opt for a 50:50 split rate mortgage, you would be charged a fixed rate on $250,000 or 50% of the total mortgage amount. A variable rate would be applied to the remaining $250,000 of the mortgage loan amount.
5. Find a mortgage with fewer fees
You need to carefully read the terms and conditions of your mortgage and enquire from your lender about the different types of fees involved in the contract. You can shop around to find lenders that offer lower interest rates and no hidden fees. Some lenders do not charge fees, but instead, charge higher interest rates. So, you should take quotes from various lenders and determine the cheapest one overall among them.
6. Consider interest-only loans
Most interest only mortgages last between 1 and 5 years. An interest only mortgage structure means you are only required to pay the interest component of your mortgage for the period, which substantially lowers your repayments. You aren’t reducing the principal (mortgage amount) and need to be prepared for a sharp increase in your repayment after the interest only term ends, and you need to pay both the interest and the principal. It’s not a good structure for everyone and can be difficult to get improved as they are higher risk for the lender. But if for some reason you are struggling with your mortgage repayments in the short term it might be worth considering.
7. Extend the length of your mortgage
Extending the term of your mortgage won’t reduce the total amount you pay, in fact it will ncrease it, as you end up paying more in interest. However it will decrease your monthly repayments. In the example I mentioned earlier a standard variable 25-year loan of $500,000 at 3.65% interest would cost $763,056, extending this same loan to 30 years would increase the overall cost of the mortgage to $823,427, but reduce your monthly repayment to $2,287, down from$2,544. If you think that lowering your mortgage repayment at the expense of higher total interest charges is a decent deal, you can contact your lender to ask them to extend the mortgage term. In most cases, lenders happily extend the loan term as they can earn more interest over the loan period.
Paying off your mortgage quickly should be your priority, but not many people have the spare cash to repay it early. Instead, aim to reduce your periodic mortgage payments and hopefully save plenty of money over the term of the loan. The tips highlighted in the blog are easy to follow and can be useful in lowering your mortgage payments.