Saving money on your home loan is easier than begging your boss for a pay rise.
When was the last time you asked your boss for a pay rise? Did you even dare to do so? Was the answer yes, no, or even worse ‘let me think about it and I’ll get back to you’….never.
The reason we a like a pay rise now and then is to have more spending money and keep up with the increasing cost of living. Fortunately, begging your boss for a pay rise is not the only way to put more money in your pocket. Reducing your expenses is the other way. And, for most of us our home loan repayment is our biggest cost, so it makes sense to start here.
Before you start
Basic information you need to gather;
- How much do you owe
- Your interest rate
- Your loan repayments
- How long to go until your loan’s paid off
- Current estimated value of your property
You may be able to do the following yourself, but I would suggest finding a reputable mortgage broker(like me) to do this for you. There are many ways you can get this wrong and what seems like a good deal may not be. See www.halogenhomeloans.com.au/avoid-this-44515-refinance-mistake if you don’t believe me.
- Check with your current bank or lender and see if you can get a rate reduction, or change to another cheaper type of loan
- If your current lender either can’t or doesn’t want to offer you a lower rate search for other loans in the marketplace that offer a lower cost loan.
- Know your costs. At the very least you will have to pay;
- Mortgage discharge fee with your current lender. Normally about $350
- Government fees to discharge your current mortgage and register a new one. Minimum $300. Varies from state to state.
- Application fees with your new lender. These could be $0 or $600 or more.
- Calculate your annual interest savings.
- Deduct your change over costs from your annual interest savings and check the benefit.
Home loan savings vs pay rise
Let’s say you have a $500,000 home loan. Your current lender hasn’t been doing you any favours and we find a way to reduce your interest rate by 0.7%.
Annual interest savings will be $500,000 x 0.7%=$3,500. Assuming there is no application fee with the new lender, your ‘change over’ cost is $650. In the first year you save $2850 and then $3500/year from year two onwards.
If your salary is between $37,001-$90,000 this equals a gross pay increase of $4418 in the first year and $5426 thereafter.
If your salary is between $90,001 -$180,000 this increases to $4672 in the first year and $5737 thereafter.
Is this worthwhile?
I guess only you can answer this question. For me getting a pay rise of this amount with a minimal amount of effort and no begging the boss look like easy money. In fact it is easy money. Given your mortgage broker does most of the work for you, it should take no more than four to five hours of your time. That’s a heck of a return on the time spent.
What will you do with your ‘pay rise’?
- Pay off your home loan sooner
- Put it aside for the kids education
- Save for a well earned holiday
- Upgrade some vital items
- Home improvements
- Blow it on a good time
Really it’s up to you how you spend your pay rise.
When is this not a good idea?
Savings money renegotiating your home loan with another lender isn’t always possible or worthwhile such as;
- If you owe more than 80% of the value of your home, refinancing to another lender is not cost effective as you’ll pay lenders mortgage insurance again. This will make a big dent in the benefits
- Your loan balance is ‘low’. If it’s under $150,000, generating real savings is difficult unless your current rate is quite high.
- If your home loan repayments haven’t all been made on time in recent months you may find it difficult to refinance to another lender
- Your household income has decreased a lot since you got your current loan and you may not qualify with another lender
- If your credit rating has taken a battering with late payments, defaults, arrears etc refinancing to a lower rate will be difficult
If any of the above apply to you, first thing to do is check with your current lender, you may get some reduction in your rate as long as repayments have been on time.
Do you want to save money on your home loan and avoid begging your boss for a pay rise?
Request a Mortgage Makeover