26 Feb, 2019

DROPPING as little as $10 or $20 extra onto your home loan can result in savings of tens of thousands of dollars and cut years off a loan term.

DROPPING as little as $10 or $20 extra each week onto your home loan can result in savings of tens of thousands of dollars in interest charges and cut years off a loan term.

The new Reserve Bank of Australia governor Philip Lowe kept the cash rate on hold at 1.5 per cent this month but borrowers, particularly those with a variable rate loan, are being urged to pay extra on their loan to help shave down the principal debt and optimise cheap borrowing costs.

Many deals — both variable and fixed — are under 4 per cent so it’s important customers first check what rate they are on and ensure they aren’t paying too much.

Otherwise the alternative is to look to refinance, financial comparison website iSelect spokeswoman Laura Crowden says.

“While extra repayments and other tweaks can add up in the long term, the easiest way to make a significant dent in your mortgage is to secure a lower interest rate,’’ she says.

“If you are paying more than this, it’s time to shop around and take advantage of record low interest rates.”

For a customer on the average home loan — a $300,000 30-year debt — if they have an interest rate of four per cent and pay just $20 extra per week their repayments would climb to $1518 per month.

But doing this would save the borrower more than $25,200 in interest charges and cut three years and one month off the loan term.

Offset accounts are also a great way to slash the monthly interest charges.

If a customer has a debt of $10,000 in a 100 per cent offset account — a daily transaction account linked to the home loan — interest charges would only be charged on $290,000.

Paying more frequently — fortnightly instead of monthly - also helps.

Monthly repayments mean 12 payments per year compared to 26 fortnightly repayments - which means the customer pays an extra month in the calendar year.

ING Direct head of products Tim Newman says while it’s easy to “fall asleep” on your home loan, many of the bank’s customers are paying more than the minimum repayments required.

“There are some great rate deals available below four per cent in particular for owner occupiers borrowing at a low loan-to-value ratio,’’ he says.

“People should also use their home loan as a savings account, rather than put extra money into a savings account at a low rate customers are better off depositing this into their home loan and reducing their interest bill.”

He says rounding up your home loan repayment to the nearest $100 mark is an easy way to make a big difference on paying down the loan quicker.

Paying extra on $300,000 30-year home loan

Additional repayment New repayment amount Interest saved Reduction to loan term

$10 per week $1475 per month $13,449 1 year, 7 months

$20 per week $1518 per month $25,221 3 years, 1 month

$50 per week $1648 per month $53,398 6 years, 7 months

$100 per week $1865 per month $85,065 10 years, 9 months

$200 per week $2298 per month $121,171 15 years, 8 months

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