Choosing a shorter tenure is a good place to start
Because purchasing a property can be such a heavy financial burden, it is critical to save wherever you have the opportunity, such as on your home loan interest. The following list should help you save some extra cash and own your dream home that much sooner.
Review your home loan and interest rate regularly
Reviewing your home loan and interest rate regularly is a smart way to save potentially thousands of dollars on your mortgage. Make sure you keep an eye on the market to see what interest rates are being offered by various lenders—even if you are comfortable making your current repayments. You can save big over time even if you make smaller interest rate reductions.
Make extra repayments
If you make extra repayments, you can pay off your mortgage more quickly, which essentially means you will then have less to pay in home loan interest. What is especially convenient making extra repayments is that you do not have to make them consistently—feel free to make them simply whenever you have the extra funds.
If you have a fixed-rate home loan, extra repayments are generally prohibited or you may be limited in the amount of money you can repay, so it is important to understand the policy of your lender before making any repayment to prevent costing yourself break fees.
Put your savings in an offset account
A simple way to reduce the interest on your home loan is to put your savings in an offset account. An offset account acts like a transactional savings account in tandem with your home loan balance. In other words, the money in that specific account offsets your loan balance and therefore reduces the interest you will have to pay.
Consider fixing your interest rate
This would be a good idea at present, because interest rates are expected to rise after a couple of years when homebuyers enjoyed record low interest rates. Switching to a fixed interest rate might help you lessen the impact of any interest rate hike. Doing so could allow you to lock down a strong deal for up to five years. When the rates do eventually rise, you will be charged the fixed rate for as long as your term lasts.
Make sure you are not overpaying your fees
Overpaying on fees is more common than you would think, so it is critical to ensure you are not paying more than you need to on what is likely one of your larger bills. Best practice would be to review your loan and make sure you are at the very least utilizing features you are being charged for, such as an offset account. Features that cost you annual or monthly fees are only beneficial if you use them.
Pay more as down payment
Typically, financial institutions will finance anywhere in the range of 75-90% of the total value of the home, leaving you on the hook to contribute anywhere between 10-25% of the remaining cost. Keep in mind, however, that it is always a good idea to contribute more money up front as a down payment, rather than paying the lowest amount possible. The reason for this is the loan amount will be lower the more money you pay initially—and so will the interest you will have to pay.
Increase your EMI
To reduce the tenure of your mortgage, you should opt for a higher EMI, or equated monthly installment. There are lenders out there who will let you revise your instalment each year. Increasing your EMI would be especially smart if you moved jobs and now earn a higher salary, for instance. The overall interest that you are responsible for will drop significantly after the tenure is reduced.
Choose shorter tenure
Because your loan tenure directly impacts the interest you will have to pay, it is a good option to choose a shorter one. Tenures between 10 and 15 years, for example, will reduce your overall interest while tenures of between 25 and 30 years will cut down your monthly instalment amount. Using a loan EMI calculator will help clarify how drastically the interest gets cut for loans with shorter tenures.
Go for home loan balance transfer as a last resort
Because any missed payments on balance transfer loans will cost you more money in higher penalties, it is important to use them as your last resort. Balance transfer-based loans kick in only after you have begun making prepayments on your loan. You can transfer the remaining principal amount to another lender or bank at a lower interest rate if you find your current lender is charging you an interest rate that is too costly.