Saving money while making repayments?
It’s possible! You just have to find the right way to do it.
But first what does a fixed rate home loan mean? It’s a type of house mortgage that allows you to lock-in your interest rate over a certain period time at approximately one to ten years. You are certain that you will only have to pay for the same loan amount and interest rate despite the sudden rise or fall of house pricing. In short, you’re basically protected from the volatile market conditions.
However, fixed rates don’t come cheap and it’s relatively higher than variable rate home loans; and thus, the need to find ways to keep your savings going. Here are some tips for earning serious savings on fixed rate home loans:
Ask for a Lower Rate
Call the bank and tell them you’ve just found a better rate and you are keen on closing the deal with this lender. Who knows, you might just get what you want right at that moment. However, be reasonable with your bargain price as the standard fixed rate in Australia nowadays is anywhere between 4 percent and 5.5 percent, depending on the fixed term period. What difference can a lower interest rate make on a home loan over 25 years?
Here’s a plausible scenario:
Say, you’ve taken out a $400,000 loan with a 4.54 percent rate over 25 years. The monthly repayments will be $2,232, which translates to a total amount of $669,700 paid over the life of the loan, plus the $269,700 amount of loan interest paid. The total amount of savings you could earn? That’s $62,900, which is good enough given the lower interest rate.
Lock-in your repayment rate, too
A technique that many home buyers do not know about is that they can actually ask for the monthly repayment rate to stay the same regardless of how much interest they are provided with. For example, of the $400,000 loan amount, you can ask the lender to keep your monthly repayment at $2,442, in which the interest rate is either 4.54 percent or 5.44 percent p.a. over 25 years.
More importantly, at $2,443 monthly repayment with 4.54-percent interest rate, you could possibly save $107,400 throughout the life of the loan.
Consider paying fortnightly
Make repayments fortnightly instead of monthly in order to shorten your payment term and save money on interest rate. You might want to pay half of your amortization fee by the second week and the whole amount by the end of the month. As a result, the total amount you owe to the lender reduces significantly; hence, you will be able to get yourself out of debt in less than 25 years.
Use the lump sum payment option
A perfect alternative to paying fortnightly, paying lump sums off your $400,000 loan can significantly reduce the remaining balance, albeit both methods have the same benefits. To be able to achieve this, save as much as money as you can like $25,000 to pay off your outstanding loan balance. This amount alone could reduce your payment term by approximately five years and save around $30,000 in interest.
Make smart choices about your fixed rate home mortgage to prevent any chances of breaking the fixed term period. As such, the lender will require you to pay an expensive break cost to compensate for the loss you incurred upon ‘un-fixing’ your house mortgage due to your personal circumstances. If you are serious about making significant improvements on your loan and cash flow, better try any of those strategies.