1. Skip the honeymoon

Beware of lenders bearing gifts. Introductory or honeymoon rates have long been an important marketing tool for lenders. You are initially offered a cheap rate on your loan to get you in the door but once the honeymoon period is over, the lender will switch you to a higher variable rate of interest.

There are two problems with this scenario. First, the variable rate is often higher than some of the lower basic loans available so you could end up paying more. Second, you need to clearly understand that a honeymoon rate applies only for the first year or two of the loan and is a minor consideration compared to the actual variable rate that will determine your repayments over the next 20 or so years.

You may also be hit with fairly steep exit penalties if you want to refinance in the first two or three years to a cheaper loan. So make sure you fully understand what you are letting yourself into before setting off on a “honeymoon” with your lender.
 

2. Pay it off quickly

Time is money. There are all sorts of strategies for paying less interest on your loan, but most of them boil down to one thing: Pay your loan off as fast as you can. For example, if take out a loan of $300,000 at 5.13% for 30 years, your repayment will be about be about $1,634. This equates to a total repayment of $588,380 over the term of your loan.

If you pay the loan out over 10 years rather than 30, your monthly payment will be $3,201 a month (ouch!). But the total amount you will repay over the term of the loan will be only $384,130 – saving you a whopping $204,250!

Calculate your loan repayments using a mortgage calculator.

3. Make more frequent payments

The simple things in life are often the best. One of the simplest and best strategies for reducing the term and cost of your loan (and thus your exposure should interest rates rise) is to make your repayment on a fortnightly or weekly rather than monthly basis. How can this make a difference I hear you ask? It works like this:

Split your monthly payment in two and pay every fortnight. You’ll hardly feel the difference in terms of your disposable income, but it could make thousands of dollars and years difference over the term of your loan. The reason for this is that there are 26 fortnights in a year, but only 12 months. Paying fortnightly means that you will be effectively making 13 monthly payments every year. And this can make a big difference.

Using our example from above, by paying monthly, you will need to repay $588,380 over the term of your loan. By paying fortnightly, you will save $54,151 in interest and 5 years off the loan. Zero pain to you, major benefit to your pocket.
 

4. Consolidate your debts

One of the best ways of ensuring you continue to pay off your loan quickly is to protect yourself against interest rate rises. If your home loan rate starts to rise, you can be absolutely positive about one thing – your personal loan rate will rise and so will your credit card rate and any hire purchase rate you may happen to have.

This is not a good thing as the interest rates on your credit cards and personal loans are much higher than the interest rate on your home loan. Many lenders will allow you to consolidate – re-finance – all of your debt under the umbrella of your home loan. This means that instead of paying 15% to 20% on your credit card or personal loan, you can transfer these debts to your home loan and pay it off at 5.13%.

As always, any extra repayments or lump sums will benefit you in the long run.

5. Split your loan

Many borrowers worry about interest rates and whether they will go up but don’t want to be tied down by a fixed loan. A good compromise is a split loan, or combination loan as they are often known, which allows you to take part of your loan as fixed and part as variable. Essentially this allows you to hedge your bets as to whether interest rates are going to rise and by how much.

If interest rates rise you will have the security of knowing part of your loan is safely fixed and won’t move. However, if interest rates don’t go up (or if they rise only slightly or slowly) then you can use the flexibility of the variable portion of your loan and pay that part off more quickly.
 

6. Stay Informed

By staying informed about what is going on in the home loan market, you might be able to stay a step or two ahead of your lender. And if you can stay one step ahead, you are already on your way to paying of your mortgage faster.

Knowing current rates can ensure your lender is still competitive and if they have fallen behind, ask for a discount or request your broker to do this for you! Even a small discount or having some ongoing fees waived can mean the difference of years and thousands of dollars off your mortgage. If they don’t come to the party, it might be worth looking at refinancing however, before you jump the gun, check out what it will cost you to switch loans. For example, there may be exit fees payable on your old loan and establishment fees on your new loan. Work it all out or get your broker to compare any possible savings that might be available to you. If it makes sense, go for it and don’t be afraid of smaller lenders!

Since the advent of the mortgage managers over the past five or six years there’s been a lot of talk about smaller and “non-traditional lenders” and how they have forced interest rates down. With the property boom, plenty of opportunities sprang up for smart lenders with low fees willing to take on traditional lenders and many have done very well indeed.

Some borrowers worry about what might happen if their lender gets into financial trouble. Keep in mind that you’ve got their money – so don’t worry too much. There are some smaller lenders whose names might not be familiar but whose rates might be enough reason to get in touch.

Some lenders also offer discounts to specific professional groups or members of professional organisations. Ask your lender or get your broker to research if your occupation qualifies you for any discounts. You might be pleasantly surprised!
   

7. Run an offset account

Instead of earning interest, any money you have in your offset account works to offset the interest you are paying on your home loan. An offset account is a transaction account that can be linked to your home or investment loan. The credit balance of your transaction account is offset daily against your outstanding loan balance, reducing the interest payable on that loan. For example, you might have a $300,000 loan and $15,000 in your offset account. Because of your offset account, you will only be charged interest on the balance of $285,000.

It also pays to have your wages paid into your offset. For example, if you get paid weekly or fortnightly, or even monthly, and those funds sit in your offset account for a few extra days per month, you could save a few hundred dollars in interest every year. It doesn’t sound like much, but it all adds up as the interest debited at the end of the month is usually calculated daily.

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