June 05, 2012
Make the most of this month's cash rate cut by honing in on home loan 'hotspots', such as your loan's interest rate, fees, repayment options, redraw facilities and more to help repay your loan sooner, according to Australia's largest independently-operated mortgage broker, Mortgage Choice.
Company spokesperson Belinda Williamson said, "A 0.25% rate cut from the Reserve Bank is what was expected this month following a subdued reaction to last month's fifty basis point rate cut, soft retail sales, weak consumer sentiment and concerns about the global economy. The second consecutive monthly cash rate cut will hopefully boost borrowers' spirits by helping to increase their ability to repay their home loan."
"Borrowers should be putting heat on their lender to pass on this month's rate cut savings. Having said that, putting any savings passed on by their lender into their home loan isn't the only strategy to help borrowers repay their home loan sooner."
"In the same way that buyers pinpoint property 'hotspots' to make the most of their investment dollars, we encourage borrowers to focus on their home loan's 'hotspots' to ensure they are getting maximum value from their loan and lender."
"There are plenty of home loan 'hotspots' worth examining and your home loan's interest rate is just the tip of the iceberg. Investigate whether or not you are making the most of any loan features such as an offset account and/or redraw facility, and make sure you are not paying extra for features you don't need or use and you are being charged a fair fee for account transactions."
"With the help of a professional mortgage broker who has access to a wide range of loan products and providers, borrowers may be able to target some surprising home loan 'hotspots' that could help them save thousands of dollars in loan interest and shave months, or years, off their loan term."
Mortgage Choice encourages borrowers to investigate the following potential home loan 'hotspots':
1. An offset account: Deposited savings in an offset account attached to a home loan helps to reduce the interest accumulated on the loan. Take a loan of $300,000 at 7% over 30 years; if an average of $5,000 was held in a full offset account from day one, the loan term is reduced by approximately 15 months and the interest owed is reduced by around $33,525. Note some lenders offer partial offset only. Find out if you have an offset account attached to your loan and if you do, make sure you are using it to your advantage.
2. Redraw facility: Allows extra repayments made to be withdrawn when needed. In some cases this is at a cost. Rather than earning interest in a savings account, where the interest earned is taxable, the funds in the redraw facility lower the principal loan amount, reducing the interest owed on that principal. If you have a redraw facility, put as much as you can into your loan such as your income and savings, and withdraw it only if it is an absolute necessity.
3. Extra repayment option: Some loans allow borrowers to make extra repayments by putting extra funds into the loan and/or increasing the frequency of repayments. Eg. a borrower with monthly repayments of $2,000 will pay $24,000 into their loan by year end. By halving the monthly repayment and paying $1,000 fortnightly, they will pay $26,000 as there are 26 fortnights in a year. Check if your loan has the flexibility that allows you to make extra repayments, and if so, see what difference extra repayments can make.
4. Focus on fees: Depending on your loan and lender, there could be monthly or annual account keeping fees, and/or fees for making extra repayments, redrawing funds or breaking a fixed rate or loan term early. In some cases the cost of a loan may outweigh the benefits. Investigate the associated fees and other loan aspects and compare your options to see if a better suited and well priced loan exists elsewhere.
5. Loan term: The length of a loan's term impacts the repayment amount and interest paid. Eg. if you borrow $300,000 at 7% over 30 years, principal and interest repayments are $1996 per month. Total loan costs are $719,493 and the interest component is $419,493. That same loan paid out over 25 years sees monthly repayments $124 higher but equates to a saving of $82,562 in interest. If you can afford the higher repayments associated with a shorter loan term, investigate the cost of changing your loan term.