Increase frequency of home loan payments to start saving

Want to save money on your home loan? Being mortgage-savvy could potentially save you a significant amount over the life of your loan.

Buying a home is one of the most exciting – and expensive – activities you’re ever likely to undertake. Put that emotion aside, though, when it comes to your repayments, because we’re about to tell you how you could save some serious money on your home loan.

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How much does a home loan cost?

calculator and New Zealand money

Your mortgage may be the biggest debt you’ll ever have, so it’s worth knowing just how much interest you could pay over the life of the loan.

When calculating the cost of a loan, using the comparison rate should give a more realistic view than simply relying on the advertised interest rate, as comparison rates include many of the lenders’ fees and charges.

Here’s an example – we’ll use this calculation to compare against in our cost saving tips below.

Loan amount $300,000
Term of loan 30 years
Comparison rate* 4.45% p.a.
Monthly repayment^ $1,511/month
Total repayment^ $544,016
Total amount of interest paid^ $244,016

If rates were to rise by just 2.00%, the same $300,000 mortgage could cost the following:

Loan amount $300,000
Term of loan 30 years
Comparison rate* 6.45% p.a.
Monthly repayment^ $1,886/month
Total repayment^ $679,086
Total amount of interest paid^ $379,086

Home Loan savings tips

The Government is investigating the use of debt-to-income ratios in New Zealand

Despite the cost, your mortgage is an investment in your future. Nevertheless, there is no point in paying out more of your hard-earned money than you need to – a few simple savings strategies might save you thousands of dollars.

Here are four simple steps to help you save money on a home loan:

1. Secure a lower rate

Financial institutions do want your business and some are prepared to reduce their rate in order to attract you. With a wealth of online comparison tools, such as the Canstar home loans comparison website, consumers are more empowered than ever.

Want some tips on how to negotiate a lower interest rate? We’ve got ’em!

Do some research, find a product that has the features you need for an attractive rate and phone your financial institution to see whether they can match it. How much could you potentially save? Even a rate reduction of 0.4% – from 4.45% to 4.05% – could potentially save you the following:

Loan amount $300,000
Term of loan 30 years
Comparison rate* 4.05% p.a.
Monthly repayment^ $1,441/month
Total repayment^ $518,727
Total amount of interest paid^ $218,727
Savings compared to original example $25,289

Simply doing some online research and asking your lender to do better could potentially net you a discount – and a nice cash saving.

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2. Keep your repayments the same

Negotiating a lower rate and maintaining your monthly repayments at their previous level could save you significantly more. Continuing with the same example, negotiating a 0.4% reduction in the rate but also maintaining repayments at $1,511 per month would look as follows:

Loan amount $300,000
Term of loan 30 years
Comparison rate* 4.05% p.a.
Monthly repayment^ $1,511/month
Total repayment^ $497,332
Total amount of interest paid^ $197,332
Savings compared to original example $46,684

Another added bonus of this strategy is that you can potentially pay off your mortgage a lot earlier!

3. Increase your regular repayments

Another fantastic cost-saving strategy is to increase your regular mortgage repayments or make extra repayments on top of your regular repayments. While it can be easier said than done for some households, making an effort to find some extra spare cash for your mortgage each month can reap big rewards.

An extra $100 per month payment, for example, on top of the reduced comparison rate of 4.05%, could do the following:

Loan amount $300,000
Term of loan 30 years
Comparison rate* 4.05% p.a.
Monthly repayment^ $1,611/month
Total repayment^ $473,464
Total amount of interest paid^ $173,465
Savings compared to original example $70,551

4. Pay fortnightly

calendar

Many New Zealand workers are paid fortnightly, yet most mortgage repayments are structured monthly. But with 26 fortnights in a year compared to only 12 months, paying fortnightly is a great  way to pay extra off your mortgage without really noticing it, because you’re essentially making an extra repayment each year.

Halving your monthly repayment and paying that amount fortnightly, along with the reduced comparison rate of 4.05%, could make the following difference:

Loan amount $300,000
Term of loan 30 years
Comparison rate* 4.05% p.a.
Repayment^ $806/month
Total Repayment^ $448,957
Total amount of interest paid^ $149,199
Savings compared to original example $94,817

How much might you save on a home loan if you follow all 4 steps?

 

By doing these four things in the above examples, that mortgage could be paid off over 8 and a half years earlier with almost $95,000 in savings!

There are plenty of other ways to save on your mortgage:

  • Using an offset account.
  • Keeping your repayments the same when interest rates decrease.
  • Increasing your repayments each year as your salary goes up.

These can all make a difference. The single thing that could make the biggest difference of all, though, is checking out whether you can get a better deal on your interest rate. So what are you waiting for?

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