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For many people, buying a home is the biggest investment they ever make. But the rising cost of living has put even more pressure on homeowners through rate rises, which have led to larger mortgage repayments.
In fact, analysis from the Australian Bureau of Statistics (ABS) found that mortgage interest charges rose 35.3 per cent annually between March 2023 and 2024. With inflation remaining stubbornly high, there’s also potential for further rate rises.
But the good news is there are ways to reduce home loans over both the short- and long-term. Here are X strategies to help you get there.
1. Ask your lender for a lower rate
If you’ve been with your lender for a while, it’s possible you’re not getting the lowest rate on offer. Sometimes lenders will have lower rates for new customers, and you may be able to negotiate with them so you get the same rate as an existing customer.
“Don’t hesitate to negotiate with your lender, especially if you’ve been a loyal customer or if you have improved your credit score since taking out the loan,” John Pidgeon, property strategist and author of Sort Your Property Out & Build Your Future tells The Australian Women’s Weekly.
“Sometimes, lenders are willing to offer better terms to keep your business. I assess this personally every six months and advise my clients to do the same.”
A simple way to approach this is by checking your current interest rate against the rate that your lender is offering new customers. If there’s a difference, contact them and ask them to match the new customer rate. You could also try asking if there are any other offers they can make you.
Bushy Martin, mortgage broker, founder of Know How Property and host of the Property Hub Podcast also says you could consider working with a mortgage broker to get a better deal.
“If you haven’t changed your home loan for over two years and are therefore paying the bank a silent increasing rate loyalty tax, a savvy broker can help you employ an array of debt reduction options,” he says. This includes negotiating with your current lender.
“Lower interest rates can mean lower monthly repayments or the ability to repay the loan faster with the same monthly payment.”
John Pidgeon, property strategist and author
2. Refinance your loan
Even if your lender offers you a lower rate, it may be worth comparing other loans.
“Keep an eye on interest rates and consider refinancing your home loan if you find a better deal elsewhere,” John says.
Refinancing typically makes the most sense for people who had a deposit of at least 20% when they got their home loan. If you have less than 20% equity, you may need to pay Lenders Mortgage Insurance (LMI) again when you refinance – or may not be eligible.
If you are considering refinancing, Bushy says you could be able to further reduce your home loan rate “by getting your home revalued to reduce the loan to value ratio (LVR)”.
In simple terms, a higher property value means a smaller LVR, which can help reduce your home loan costs.
3. Consider an offset account
An offset account is a type of savings or transaction account that’s linked to your home loan and can help reduce the amount of interest you pay.
“The balance in this account is offset daily against your loan balance, reducing the interest payable on the loan,” John explains.
As an example, if you had a $600,000 mortgage and put $15,000 in an offset account, you would only be charged interest on $585,000.
As John puts it, this is “the ninth wonder of the world” when it comes to ways to reduce home loans.
But keep in mind that not all mortgages have offset account facilities. And the amount that’s offset will change if you add or withdraw funds from the account.
4. Make extra repayments (when you can)
This isn’t always possible but if you’re able to make extra repayments, it will help reduce your home loan costs over the long term.
“One of the most effective ways to reduce your home loan is by making extra repayments whenever possible,” John says.
“Even small additional payments can significantly reduce the principal amount and the total interest paid over the life of the loan.”
The government’s Money Smart website has a mortgage calculator you can use to estimate savings from extra repayments.
Just keep in mind that these payments won’t necessarily reduce your monthly repayment amount. But they will help you pay off the loan faster. And in some cases, you may be able to redraw them if you need the funds in an emergency.
Bushy adds that “keeping your repayments the same” after you get a lower rate or “switching repayments from monthly to weekly with a bank that charges interest daily” are two other ways to pay extra and/or save on interest charges.
5. Review the fees and charges
Depending on the home loan, you could have monthly or annual account fees, early exit fees or other charges that add to the cost.
“Minimising these costs can save you money in the long run,” John says.
But remember to factor in any potential savings you get from paying fees. For example, a home loan package may charge an annual fee but offer savings in the form of competitive rates, an offset account or even a credit card with a waived annual fee.
If you’ll use these features, it may be worth it but you’ll need to consider your own circumstances before deciding. If you’re not sure, you can use a mortgage calculator to compare fees and interest rates, or consider discussing it with a mortgage broker.
6. Leverage an investment property
If you have an investment property or are in a position to buy one, it could be a way to reduce your home loan costs in the future.
Bushy says this can be a way to “take debt reduction to the next level”.
“[You could] buy an investment property where the surplus cash flow is used to pay down your home loan even quicker, and then sell the property when you stop work and use the equity gained to pay out any remaining home loan.”
But before investing in property, remember to think about the financial risks involved and whether it’s a reasonable option for you at this stage in your life.
If you need financial support at any stage, you can also contact your lender to discuss options. Or, speak to a financial counsellor for free by calling 1800 007 007 or using the National Debt Helpline’s online chat service.
*This article contains general advice only and may not be suitable for your circumstances. Make sure you seek financial advice appropriate to your individual circumstances before making decisions.
