31 Jan, 2021

After an unpredictable year, 2021 could be the right time to find a more competitive interest rate for your home loan. With interest rates at record lows, lenders are competing with each other to claim and keep borrowers. So, your chances of finding a good home loan deal are looking pretty good.

Like many Australians, you might have been financially impacted by COVID-19, so it’s a good year to see how you can save on your mortgage.

In this article, we’ll go through some home loan hacks to take into the New Year to get a lower interest rate and save in 2021.

1. Make the most of low interest rates available

With interest rates at historic lows, there’s a good chance that you could find yourself a better interest rate. In particular, if you haven’t refinanced in 18 months, you could be paying too much.

Compare your current interest rate to other home loan interest rates out there and see if yours is still competitive. With rates being so low, something to consider is fixing your interest rate. This would lock in a current competitive interest rate for the next 1-5 years.

A fixed interest rate is something that borrowers seeking stability may be interested in. It means that for the fixed period, your interest rate won’t go up or down. Plus, since you’ll know exactly how much you owe each month, you’ll find budgeting easier.

But, since the RBA have indicated that they don’t plan to increase the cash rate for another 3 years to assist with post-pandemic recovery, a variable interest rate is still an option to consider.

2. Negotiate with your current lender for a lower interest rate

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Before you go looking at what interest rates other banks are offering, be sure to check with your current lender. Find out what rates they’re offering to new customers. If these rates are lower, call them up and ask them for a lower rate.

Here are our tips for negotiating a lower interest rate:

  • Ask for the same rate new customers get
  • Do your research to show to your lender that you know you could get a better deal
  • Use your loyalty as a bargaining tool
  • Be vocally willing to move on to a new lender
  • Prove yourself to be a model borrower with good credit, at least 20% equity, on-time repayments and stable employment.

3. Polish up your credit score

Lenders spend time assessing your credit history to decide how risky it will be to lend to you. If you have a series of late repayments, defaults and credit enquiries, they will likely perceive you as high risk and your chances of being approved for a low rate home loan become limited.

If you do have poor credit, it doesn’t mean that you won’t be able to get a new mortgage at all. There are specialty lenders who provide loans to poor credit borrowers, but these loans will usually have higher interest rates to account for the risk.

If you want to increase your chances of getting your ideal home loan, spend some time improving your credit score by:

  • Checking your credit report yearly (or at least before refinancing/applying for a loan) to check for errors, inconsistencies and your overall history.
  • Pay your bills, mortgage and loan repayments on time. Set up automatic payments, so you won’t have to worry about forgetting.
  • Don’t make too many home loan applications as these are all recorded as credit enquiries.
  • To avoid missing repayments, consolidate your various unsecured debts under your home loan.
  • Try to maintain financial stability by avoiding switching jobs too soon before a loan application.

4. Prove yourself to be the ideal borrower

Your chances of being approved for a low rate home loan will be greater if you present yourself as the ideal borrower. To do this, make sure you:

  • Make on-time home loan repayments.
  • Have evidence of savings (you can use a high interest savings account to maximise your savings).
  • When applying for a home loan for a new property, have a larger deposit as you will have more home loan options and possibly more competitive interest rates.
  • Maintain stable employment and income.
  • Have a healthy credit rating.

5. Don’t change your repayment amount after getting a lower interest rate

When you’ve secured a lower interest rate, it might be tempting to reduce your repayment amount to match the principal and interest repayments you made with your higher interest rate. If you want to pay off your mortgage faster, avoid doing this.

Also, with a lower interest rate, you’ll have more cash to put towards extra repayments or an offset account.

6. Pay less interest with an offset account or redraw facility

While the first step to saving on interest is getting a lower interest rate, you could also look into setting up an offset account or redraw facility. You may already be paying fees for an offset or redraw, so it’s important to check first. If you are, either call your lender to cancel them, or start using them to help reduce the interest you pay.

Always check whether your interest savings will outweigh account fees. Try our offset calculator to see whether you could save on interest:

How much can you save with an offset account?

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An offset account is a kind of savings account linked to your mortgage. Any funds in this account offset the interest you pay on your home loan, plus you can spend from this account as normal.

For example:

If you have a $200,000 home loan with $30,000 in an offset account, you’ll only have to pay interest on $170,000 of your home loan.

A redraw facility is similar. By setting up a redraw facility, you pool any extra home loan repayments you make into an accessible account. Like the offset account, any funds in your redraw offset how much interest you pay. Unlike an offset account, however, you usually can’t access the funds in your redraw as easily. Typically, there may be a withdrawal fee and a wait time.

What are other ways to save on top of getting a lower interest rate?

Looking to save even more? Can’t switch to a lower interest rate right now? No worries, you have other options.

Make extra repayments

If you have the ability to do so, make extra repayments towards your home loan. This will help you pay down your mortgage faster and the faster you pay off your mortgage, the less you’ll have to pay in interest.

So, next time you get a work bonus, tax refund or inheritance, consider putting these funds towards your home loan.

Make more regular repayments

If you make your regular repayments fortnightly, rather than monthly, you’ll end up paying the equivalent of an extra month’s payment per year. This small change will help pay off your home loan faster, saving you interest.

You could even switch to making weekly repayments, but make sure you speak to your lender to find out how you can change the frequency of repayments.

Find a zero-fee home loan

Why bother with a fee-filled home loan when there are lenders offering zero fee options? Speak with a mortgage broker to find out which lenders offer mortgages with no fees or low fees.

However, sometimes these low fee home loans come with a marginally higher interest rate to compensate for the lack of fees. Work out whether you’ll actually be saving by switching to a zero-fee home loan.

Got a home loan question? Just ask!

We’re here to help. Get free expert advice at a time that suits you. Choose a time to chat with a DJB Home Loan Specialist here

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