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  • Cameron Finlay

Reducing Home Loan Debt

Interest rates are probably either near the top or perhaps starting to fall. However, that doesn’t mean the fall will be fast or material.

The interest rate is not the only consideration in managing the home loan. No matter what stage you’re at with your home loan, there are tactics to make savings in interest, reduce repayments and help the family cash flow.

If you haven’t spoken to your bank for a while (so many branches have closed, (you might have to search to find one), call and ask for a better rate. It’s not likely banks will be proactive in offering loyal customers a lower rate, best deals seem to be only offered to new customers.

The bank has a cost to acquire a new customer so can offer a reduction to existing borrowers, when asked. If the answer is ‘sorry’, brokers should be able to get you a more competitive rate. (If you don’t have one, call us, happy to introduce you to experienced brokers who are not tied to banks).

There are a number of ways that interest can be saved and a home loan repaid faster.

1. Consider your Interest Rate strategy, “the best deal”

The interest rate charged has a big impact on ongoing costs and repayments. Fixed rates give stability because repayments don’t change. Variable rates are subject to market fluctuations. If you can’t choose, consider some fixed and some variable, like 50/50.

2. Repay Fortnightly, not Monthly

Increasing the frequency of payment utilises the power of compounding interest in your favour. A $600,000 loan with repayments made fortnightly can reduce the term of the loan by almost 4 years and save around $90,000 in interest over the term. Note – paying weekly rather than fortnightly doesn’t make much of a difference.

3. Make Extra Repayments

If you have spare cash, reduce the home loan faster by making extra repayments. By lowering the loan balance with additional repayments (even by say 10% extra a month), almost 4 years of the term can be reduced. Consider too using your tax refund, or a windfall like an inheritance.

4. Maintain repayments if Interest rates fall

Consider refinancing to a lower rate, or take advantage of an interest rate reduction, then continue to make the same repayments as before. These are extra repayments and can take years off the loan.

5. Take advantage of an Offset Account

If you have spare funds, deposit them into the Offset account. The bank deducts the credit in offset from the loan account before interest is charged, in effect it means the bank pays you at the same rate as it charges you on the loan.

6. Use a Credit Card

Use a credit card to pay your expenses and ensure you pay off the card at the end of the interest-free period (some have 55 days). In the meantime, the salary goes into an Offset Account so you reduce the interest charged on the lower balance.

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