If you have committed to a mortgage – or are considering doing so – there is a reasonable chance this will be the largest debt you ever commit to. Generally speaking, your mortgage loan and repayment structure will be over the course of 25 to 30 years. Whilst this can provide enough time for you to pay it off, you will likely accrue a large amount of interest over the course of paying your mortgage. This means the already large sum of money can become significantly larger. In fact, it is very possible you will end up paying more than double your original loan without exceptional planning.
As such, it is worth considering how to reduce your mortgage to something more manageable.
Interest Rate Adjustments in 2022
Before getting to our tips, it is important to acknowledge recent changes that will likely affect your mortgage situation. The Reserve Bank of Australia (RBA) recently announced a significant increase to Australia’s official interest rate; coming into effect on May 13, 2022. The governor of RBA, Philip Lowe, explained that the “economy has proven to be resilient and inflation has picked up more quickly … than was expected”.
As such, the national interest rate has suddenly risen from 0.1 per cent to 0.35 per cent. The most important thing to consider is that while this adjustment has been made due to the economy beginning to recover after COVID, your wage may not have increased to the same extent as the interest rate. Such a significant shift in interest rate means many borrowers will most likely see their borrowing power reduced.
In addition, current home owners with variable rate mortgages are encouraged to check how these changes will affect them, as it could see a rise to their interest rates very soon.
Ways to Reduce Your Mortgage in Australia
There are a number of different ways to reduce the amount of interest paid on your mortgage. When all added up, these methods can lead to a significant mortgage reduction overall.
1. Get a loan with an offset account
Offset accounts function effectively as savings or transaction accounts linked to your mortgage. The balance in this account reduces the remaining amount on your mortgage, as the amount in the offset account does not have interest charged on it.
According to the chief economist at PDR Real Estate, Diaswati Mardiasmo, when “your home loan has an offset account and you have a high amount of money in that account, then a small change in interest rates may not impact your monthly repayments as much”. Evidently, there are clear potential advantages to having an offset account. As Mardiasmo continued, if you don’t have an offset account, you will definitely feel more of an impact”.
2. Lengthen the term of your mortgage
Under certain circumstances, it can make sense to lengthen your mortgage in order to reduce each repayment. When combined with a lower interest rate, this can really add up over time, because you should still have the flexibility to get ahead of your payments, should your financial situation allow it.
3. Consider choosing a variable rate
By choosing to make your mortgage repayments at a variable rate, you give your lenders the opportunity to react to the market. Should the national interest rates go down, you will be able to reap the benefits. However, it is important to be highly diligent about your situation. When national interest rates should go up, you run the risk of your rates increasing well beyond what you had budgeted for. As such, a fixed rate would make more sense under those circumstances. Either way, it is important to consider these things before committing to your mortgage.
4. Improve your Credit Score
The better your credit score, the better chance you have of receiving the loan you want, and at a lower interest rate. When you have a good credit score, lenders will look at you more kindly, as they will have greater faith that you will be able to make your repayments. Before you begin the process, make sure you know whether you have a good or bad credit score so you understand your borrowing potential.
5. Adjust your repayments to suit your income
When you set up your payment plan, it will most likely align well with your income; both in terms of amount, but also how often you get paid. As time goes on, you might have a different job, or your payment structure will change, so it makes sense to adjust your mortgage repayments to suit how often you’re getting paid. By doing this, it can be easier to factor your income into your repayments, and therefore organise your finances more effectively. By achieving this, you will likely increase the chances of making extra repayments to your mortgage.
Additionally, when you have the opportunity, be it tax returns, salary bonuses or you’ve simply got your finances well organised, it can be highly advantageous to make extra repayments. After all, the sooner you get your mortgage paid the less that interest rate will rise.
6. Look for a lower interest rate
Ideally, your original home loan package was the best option possible at the time, given your financial situation and other factors. But expenses and income change, and quite often your interest rates will increase over time.
Get to know all the intricate elements of your loan repayment plan. This way, you will be able to clearly tell if similar loans to yours have better rates. When you find a better rate somewhere else, you can ask your current lender to provide a better rate, or potentially switch over to that lender. But be careful, make sure you thoroughly understand all elements of any loan you have or want to switch to. This way you can make the most informed decision possible.
7. Reducing other expenses
By reviewing your budget and reducing your other expenses, you will have extra flexibility to repay your mortgage. This doesn’t have to mean you focus all your income on your mortgage, but even a few hundred dollars more than required every few months can have a significant impact on your overall interest paid.
8. Choose the right property
It might sound obvious, but long-term affordability should be a key consideration when choosing the best home to purchase for you and your family. A discrepancy in prices may seem manageable when signing up in the first place, but interest rates will ultimately hurt you if you struggle to stay on top of your repayments.
For example, if you assessed that $500k is the price you are willing to pay, you have likely done so having already considered the interest rates and your current financial situation. If a house worth $550k should appear that you like slightly more, it can be easy to think of this as a 10% increase, which might seem doable. But don’t forget, interest rates can increase over time, and all the different variables may mean the difference ends up being well in excess of the extra 10% you had accounted for.
Need mortgage reduction help?
This list is just a starting point when it comes to mortgage reduction strategies. If you are looking to refinance your home loan or need other assistance with your current debt situation, give Debt Negotiators a call on 1300 351 008.