Save up to $373K on your home loan without putting in an extra cent

Don’t pay any more interest on your home loan than you have to. Here are six ways you can cut your interest bill without paying an extra cent.

The Reserve Bank of Australia (RBA) may have left the cash rate on hold at its December meeting but that doesn’t discount the pain many households are feeling from the 13 rate hikes since May 2022. And, the pause in December doesn’t necessarily mean it will be clear sailing from here on in. There is speculation we may see at least one more rate rise in the new year.

The good news is that, even if your budget is already stretched, there are a number of things that you may be able to do to save money on your home loan without putting in an extra cent. Here are six options that could potentially cut your interest bill by as much as $373,000. Keep in mind, these numbers are based on hypothetical scenarios but they should provide you with some food for thought.

Use a cashback site

A cashback site that can help you pay off your mortgage when you shop could be just the thing to help you reduce your interest bill. Grow My Money, formerly known as Super Rewards, lets you do just that.

Typically, cashback providers receive a commission from linked retailers each time you make a purchase via the app or website. Part of this commission is paid to you, usually as a percentage of the purchase price. Most providers will deposit the cashback into your nominated bank account but Grow My Money gives you the option of getting it paid into your home loan or your superannuation account.

Canstar’s number-crunching found that a cashback payment of $40 a month has the potential to reduce the total interest paid on a $600,000 home loan over a 30-year term at 6.88% by $31,825. And the home loan will be paid off about 11 months quicker.

Putting $40 cashback into your loan each month

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 Source: www.canstar.com.au – 29/11/2023. Based on the average owner occupier variable home loan rate (6.88%) on Canstar’s database, available for a $600k, 80%LVR, P&I loan; excluding introductory and other special condition loans.

Put your savings to work

If you have money stashed away then make the most of it by popping it into an offset account which is essentially an everyday account linked to your home loan. The money you have in this account “offsets” the amount you owe on your mortgage, and effectively means you’re paying interest on a smaller amount. The result? A lower interest bill.

Let’s take a look at how the numbers stack up. Let’s say you have a $600,000 home loan over 30 years and you’re paying 6.88% interest. If you always had $10,000 sitting in your offset account the total interest you’d pay on your loan would be $755,312 – about $64,000 less than if you had no money in your offset account.

If you upped the amount in your offset to $40,000 you’d potentially reduce your interest bill by a whopping $218,871 and wipe almost five years off the term of your loan.

Make sure you check what rate you are paying on your home loan. Home loans with offset accounts are very common so try to avoid paying a premium price to have this feature.

Stashing your savings in an offset account

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Source: www.canstar.com.au – 29/11/2023. Based on the average owner occupier variable home loan rate (6.88%) on Canstar’s database, available for a $600k, 80%LVR, P&I loan; excluding introductory and other special condition loans. Calculations assume a constant offset balance over the entire loan term.

→ Related:  6 things you need to know about redraw and offset

Live off your credit card

Don’t have any savings? No worries. You can still make an offset account work for you by arranging for your salary to be paid straight into your offset account and using a credit card with interest-free days to pay for your expenses.

The idea is that you live off your credit card while keeping your pay in the offset account to work on reducing your interest bill. You need to make sure you pay off your credit card in full before the end of the interest-free period so you aren’t hit with interest charges on your credit card.

Let’s say you have a $600,000 home loan at 6.88% interest over a 30-year term, you earn $6,012 each month after tax and your monthly expenses add up to $2,068. Your interest bill over the life of the loan would come to $819,688. Simply getting your salary paid into your offset account, using your credit card to cover your expenses and paying it off in full by the due date could potentially reduce your interest bill to $780,033 – a saving of about $40,000 – and shave eight months off the term of your loan.

You need to take care with this strategy. The best way to make sure you don’t run into trouble is to not overspend. It’s a good idea to set your credit card limit close to what you estimate your monthly expenses are so that you don’t spend more than you earn.

Depositing your salary into your offset and living off your credit card

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Source: www.canstar.com.au – 29/11/2023. Based on the average owner occupier variable home loan rate (6.88%) on Canstar’s database, available for a $600k, 80%LVR, P&I loan; excluding introductory and other special condition loans. Monthly salary based on annual Average Weekly Earnings (ABS, May 2023), with tax and 2% Medicare Levy applied.

Switch to fortnightly repayments

One of the easiest ways to slash your interest bill is to pay fortnightly instead of monthly. To maximise your savings the trick is to take the monthly repayment, halve it and then pay that amount every two weeks. As there are 26 fortnights in a year that’s the equivalent of making 13 monthly repayments rather than 12.

As the table below shows, on a $600,000 loan over 30 years at 6.88% interest, this simple strategy could reduce the total interest paid by more than $207,000 and see you paying off your loan about 6 and a half years sooner. It’s important to note that some lenders take the monthly repayments figure, multiply it by 12 and then divide it by 26 to give you a fortnightly amount. While this is technically correct, the savings will be much lower – about $16,000 using this same example.

If you opted to divide the minimum monthly repayment by four and pay weekly, the savings are about $2,000 higher than paying fortnightly.

Making fortnightly repayments on your home loan

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Source: www.canstar.com.au – 29/11/2023. Based on the average owner occupier variable home loan rate (6.88%) on Canstar’s database, available for a $600k, 80%LVR, P&I loan; excluding introductory and other special condition loans. 

Refinance to a cheaper loan

There are plenty of opportunities to score a great rate on your home loan. In fact, it’s still possible to get a rate starting with a five.

Switching from the average variable rate of 6.88% to the cheapest in the market of 5.59% could potentially reduce the monthly repayments on a $600,000 loan over 30 years by $503 from $3,944 to $3,441. The total interest bill over 30 years would also be about $181,000 lower over the life of the loan.

Now, here’s another tip. If you can afford it, keep your repayments at the level you were paying for the more expensive loan and you’ll save even more. Using the same example above, if you refinanced but stuck to the original monthly repayments of $3,944, you’d save $373,073 in interest and pay your loan off almost eight years sooner.

Refinancing to a cheaper loan

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