Simple mortgage move to save $445,000 in interest and cut ’14 years off your loan’
June 19, 20264 Mins read6
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Ben Nash has revealed how the average Aussie mortgage holder could significantly cut down their interest repayments. ·Ben Nash/Getty
Your mortgage is probably your biggest household expense, and even though interest rates are coming down, at the current level they are leaving many Aussies stretched.
So as a result, over time there is a divide between the interest rates offered by banks for new customers compared to those that longer term loyal customers have to pay.
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The statistics show this difference in interest rates on average is between 0.5 per cent – 1 per cent, which on the average mortgage size of $665,978 means paying between $3,329 – $6,658 extra each year in interest costs.
Just a 0.5 per cent difference in mortgage interest rates on this loan size means $197 in interest saved each month.
If you get this money and pay it directly into your mortgage, it would save $97,000 in interest costs over a 30 year mortgage – and mean you pay off your loan around four and a half years sooner.
Switch to weekly repayments
Making your mortgage repayments weekly rather than monthly might not seem like a big deal, but this could help you pay off your loan almost six years faster.
Because there are 52 weeks in a year, by splitting your monthly repayment into four and paying each week, you end up making an extra month’s worth of repayments each year ($4,129).
This done consistently over the term of a 30 year mortgage saves a staggering $195,964 in interest costs.
This works because your mortgage interest compounds daily, meaning that every dollar you pay off sooner slashes what the bank can charge you later – and those savings compound over time.
A small change to your payment frequency can mean a big change to your future financial position.
Park cash savings in an offset account
An offset account is one of the most powerful tools to get debt free faster, but most people don’t use it properly.
Every dollar you have sitting in an offset account reduces the amount of interest the bank can charge you, so instead of getting a small amount of interest on a savings account that’s then taxed – you receive a full saving at your current mortgage interest rate completely tax free.
Consider this example.
You have a mortgage of at the average Aussie mortgage size of $665,978, and park $30,000 in your offset account.
In this case, the mortgage size the bank charges interest on is $635,978, which over a 30 year loan term results in a $108,000 interest saving, and sees you paying off your loan 2.8 years sooner.
Using your offset account is one of the simplest ways to claw back money from the bank, so it’s worth taking advantage of.
Make extra lump sum payments whenever you can
Unexpected cash like a bonus, inheritance, or even a juicy Christmas gift from Nanna can be mortgage rocket fuel – if you put that money to work.
Throwing some extra cash at your loan early makes a massive difference because it reduces your loan balance immediately, and that smaller balance saves you on compounding interest for years.
For example, paying an extra lump sum of just $10,000 off a loan of $665,978 in year five will save you around $45,000 in interest costs and cut your loan term by 1.4 years, and $20,000 in extra repayments in year five means $90,000 in interest saved and paying off your loan 2.8 years sooner.
Bonus points if you’re able to throw in that extra cash even earlier, because the sooner you push down the balance, the more the savings compound.
Rethink your loan structure
If you’re serious about getting debt free sooner, your loan structure matters.
Consider whether to use a fixed vs variable loan, or split it up with a combination.
This can give you certainty around your repayments with the flexibility to pay off extra money sooner.
Another more advanced structuring option is using debt recycling to convert non tax deductible mortgage debt into deductible investment debt, this lowers your effective interest rate and means huge interest savings are up for grabs.
Calling out that this area is a bit more advanced, so it’s worth getting some quality advice – but the savings can also be bigger, so it’s definitely worth being across your options.
The wrap
A 30 year mortgage doesn’t need to take 30 years, if you’re smart about how you go about things.
By refinancing regularly, looking at your repayment frequency, using offsets and making extra lump sum repayments, and nailing your loan structuring – you can easily save big.
The five examples above combine to generate $445,964 in interest savings and help you pay off your loan 14.7 years sooner.
This is the same mortgage, with a different strategy – and can give you a completely different financial future.
Ben Nash is a finance expert commentator, podcaster, financial adviser and founder of Pivot Wealth. Ben’s new book, Virgin Millionaire; the step-by-step guide to your first million and beyond is out now on Amazon | Audiobook.
Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.
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