If you currently have a home loan, it is worth contacting your current lender to make sure you are on the most competitive rate available. Unless you are fortunate enough to have a good relationship with a mortgage broker (hint our clients have access to this service), shopping around to find comparable rates and changing lenders is a lot of time and effort, so starting with your current lender and seeing if they can sweeten the deal for you is a sensible first port of call.

Tip: make sure you compare apples with apples. We all know well-meaning friends and acquaintances who talk about their home loan rate of X% being the lowest around, but just know that banks and lenders don’t have one rate that fits all. The interest rate offered is widely variable (pardon the pun) depending on the purpose of the loan (investment vs owner-occupied), the borrowing amount (generally the bigger the loan, the lower the rate), whether the interest rate is fixed or variable (or a combination of both), the loan term, and the loan to value ratio (LVR), i.e. the equity you have in the property relative to the amount borrowed.

So don’t directly compare your home loan rate to a friend that says they have a better interest rate than you – often the reverse could be true when taking into account your own unique situation.

Bubble: For a script to follow when calling your bank to ask for a rate reduction, get in touch with me here.

Once you have received your current lender’s best rate, whether that be a reduction or confirmation you are already on their best rate that they can offer, you can compare to other options, i.e. refinancing your loan to another lender to get a better deal.

Pro tip: Good mortgage brokers have access to a whole universe of bank and non-bank lenders and options, so they cut through the noise and prepare a shortlist of the best options for you to consider, saving you both time and money.

Here is an example of how much a 0.5% rate reduction could save on an average mortgage.

Loan size:                                                        $800,000

Average Interest Rate:                             4.43% p.a.

Loan term:                                                      25 years

Monthly Minimum Repayment             $4,415

Loan size:                                                        $800,000

Average Interest Rate:                             3.93% p.a.

Loan term:                                                      25 years

Monthly Minimum Repayment             $4,192

Monthly saving                                             $223

Based on making the new minimum repayments, you will save $66,930 over the life of the loan.

If your home loan is bigger than this, the monthly saving will be much higher using this example.

Continuing to use the refinancing scenario above, there’s also a kicker. If you continue to making the previous level of repayments into the new loan with the lower interest rate, you will save $109,197 over the life of the loan, and repay your mortgage 2 years sooner.

Tip: making additional repayments in an offset account is a flexible way to save interest, because you retain full access to the cash should it be needed in future. This is handy in the event of an emergency or to pursue a future investment opportunity.

The cashflow saving from refinancing to a lower interest rate also gives you the opportunity to explore investments outside of your home. For example, if you took the $223 per month saving in the home loan repayments in the above example and invested into a share portfolio over the same 25 year term, assuming an average return of 8% p.a. (which is a reasonable expectation of a long-term growth portfolio return), the portfolio would be worth $195,631 at the point when your home loan has been repaid.

Not a bad position to be in, for simply repurposing your existing outlay.

Another trick to save you interest is to switch from a monthly to fortnightly repayment frequency. On the $800K loan example above at the lower rate, if you were to change to fortnightly repayments (at the same amount, no additional) you would repay the loan 3 years faster and save a further $63,810 in interest – simply just by changing when you make the repayments.

If you are feeling the pressure of the rate rises though, your ability to repurpose your repayment spend to wealth building or accelerating your debt repayment may require you to rethink where else you are spending.

While there is usually only so far you can tighten the proverbial belt, it can be a really useful exercise to take a good look at your spending and identify any cashflow ‘leaks’. Things like discretionary expenses (think restaurants, take aways, clothing and personal care) are a good place to start. A good rule of thumb is to ask yourself whether the item in question is an ‘instant gratification’ or quick thrill, as opposed to something that you will derive benefit from over a longer period of time. Or, can you defer the purchase to stretch out the time between drinks, allowing your cashflow to go further.

Also consider the impact of additional repayments upfront. Taking our example above, if you can pay off an extra $10,000 at the start of the loan period, it reduces the loan term by 6 months and saves $10,638 in accumulated interest. The point being, a small sacrifice today has a much greater impact than a pay rise/delayed repayment later. Always remember, time is one of your most valuable assets when it comes to money.

Whether you are comfortable now or already feeling the effect of rising interest rates, it is still a good time to adjust unnecessary spending. If you are on a fixed rate home loan, beware that your repayment will be likely to increase once the fixed rate period expires, so by not acting now you will simply be taking the hit further down the road when forced to, rather than proactively taking charge now on your own terms.

If you are thinking of buying a property in future and looking at home loans, the best thing you can do is be aware of your spending and budget, and allow for buffer in your calculations of how much you can afford in monthly repayments.

By ‘stress testing’ your situation, you will know your limits and how much you can withstand, should interest rates continue to rise (or remain at the higher levels we have seen) into the foreseeable future. A good guide is to assume your mortgage repayments will 2-3% p.a. higher than the current rate.

And of course, make sure you are getting the most efficient rate for your circumstances (which may or may not be the same rate as your mate who has ‘the lowest rate around’).

Talk to us if you’d like someone to do the work for you and find you the optimal home loan package, or compare your current rate to give you peace of mind you have explored all options.