Insider Tips To Outsmart Your Mortgage

Whenever you use finance to buy something, it’s like renting money from a lender. I reckon it’s great that we can do this, but I think that there is room for most of us to improve the way that we interact with our loans. Doing this right means saving a lot of money over the life of the loan, like, a lot of money.

The point of having a ✨good✨ broker is that you don’t need to worry about any of this – they will tell you how to do it! (Your broker is being paid so I reckon they should be helping you with all of this! I’ll write another blog about this topic soon). However, if you don’t have a good local broker to help with this (hit me up!) or if you’re just a bit of a nerd with some curiosity, then here are some of my thoughts on the topic.

 

Do you know how much interest you are really paying?

A cute trick that you can do whenever you are looking at getting finance is to actually count how much you will be paying by the end of the loan.

Let’s use a mortgage of $500,000 at a sharp interest rate of 6.09% (In April 2024, that’s pretty low!) Your repayments on a 30-year loan would be about 3,026.75.

So, let’s find out how much you will repay on a $500,000 home loan…

3026.75 x 12 (months) x 30 (years) = $1,089,630

I’d love to know if you expected that or if you ever thought to check. This quick calculation tells you that you are paying 589,628 just in interest! That’s more than the amount you borrowed, just in interest!

 

So… what is in a Loan Repayment?

Your home loan repayment is made up of two components: Principal and Interest

The principal is the $500,000 that has been loaned to you

The Interest is the ‘rent’ that you pay the bank for giving you that $500,000. In this case, the interest is costing you $589,628.

Let’s use that home loan repayment of $3,026.75 per month to understand this a bit more.

At the end of Month 1, since you haven’t made a repayment yet, you owe the whole $500,000 and you’re going to be charged interest on all of it. At 6.09% per annum, that works out to be $2,537.50 in interest.

Once the bank takes the interest you owe, the rest of your repayment goes towards repaying the principal (this is the part where you’re actually paying off your loan).

Let’s do the math:

$3026.75 (Repayment) – $2537.50 (Interest Charge) = $489.25 (Principal Paid). That means the interest charge is over 5 times more than how much of the loan you’re actually paying off!

As time goes on, those small amounts of principal being paid start to accumulate and the amount owing goes down. Since your repayment stays the same, you will being charged interest on a smaller and smaller amount.

Let’s see a few points in time on the loan:

Point in time

Balance Owing

Repayment

Interest Charge

Principal Paid

Month 1

500,000

3026.75

2437.50

489.25

Year 10

429,860.41

3026.75

2,181.54

845.20

Year 19, Month 9

(Tipping Point)

296,798.83

3026.75

1,506.25

1,520.49

Year 20

290,670.42

3026.75

1,475.15

1,551.59

Final Payment

3,011.46

3026.75

15.28

3,011.46

Total

NA

1,089,630

589,628.21

500,000

 

Some takeaways:

  • It takes almost 20 years to finally be paying more towards Principal than Interest; the tipping point
  • At the tipping point, you still owe more than half of the original loan but it only takes another 10 years to pay off the rest of the loan
  • This tells us that;
    • The tipping point occurs 65.8% of the way through the loan,
    • at which point only 40.6% of the loan is repaid
    • yet the remaining 59.4% of the loan is repaid in 34.2% of the loan term!

 

What you can do about it

Here are five things that can be done to make a huge impact:

  1. Use an Offset account or a Redraw facility
  2. Make Extra Repayments
  3. Pay Weekly or Fortnightly Instead of Monthly – mostly because bankers can’t math properly
  4. Refinance to a Lower Interest Rate
  5. Regularly ask for a rate review with your lender

 

  1. Use an Offset Account or a Redraw Facility

An offset account is a savings or transaction account linked directly to your mortgage.

A redraw facility allows you to make extra repayments that can be transferred back out. It can’t be used like a transaction account but you do still have access to your money.

The balances in your offset and redraw are used to reduce the balance on your mortgage for the purpose of calculating interest charges. For example, if you have a mortgage of $500,000 and an offset account balance of $50,000, you will only be charged interest on $450,000. This can lead to substantial savings over the life of your loan.

Since it doesn’t reduce your repayment amount, the split of Principal and Interest becomes more favourable for you.

For example, let’s say that by the start of year 4 you have $50,000 in a redraw facility or an offset account – maybe you saved, sold a car, got a bonus, whatever… this would see you saving 164k in interest and paying off your loan almost 6 years faster!

Here is a table showing some different offset & redraw balances against that $500,000 mortgage at year 4.

 

Principal

Interest

Total Interest Saved

Years shaved off your loan

The Split with $0

$587.04

$2439.70

0

0

The split with 50k in savings

$843.77

$2182.97

$163,885.28

5y 10m

The split with 30k in savings

$742.27

$2,284.47

$107,252.75

3y 9m

The split with 20k in savings

$691.52

$2,335.22

$74,908.04

2y 7m

The split with 10k in savings

$640.77

$2,385.97

$39,334.5

1y 4m

 

 

  1. Make Extra Repayments

The bulk of interest charges occur at the beginning of a loan. Therefore, reducing the balance as fast as possible by making extra repayments is a super powerful way to save you heaps. You may be surprised by how much of an impact a small extra repayment can make. For this example, we’ll use the same 500k, 30-year loan with a 6.09% interest rate.

 

 

Extra Repayment (weekly)

Total Interest

Interest Saved

Net Saved

(Interest Saved – Extra Repayments)

Loan Term

Years Saved

0

$589,628

0

0

30 years

0

$50

$477,023

$112,604

 $47,170.67

25y 2m

4y 10m

$100

$403,525

$186,103

 $72,569.67

21y 10m

8y 2m

$125

$375,282

$214,346

 $84,320.00

20y 6m

9y 6m

$150

$351,002

$238,626

 $90,408.67

19y 4m

10y 8m

$200

$311,279

$278,349

 $101,527.33

17y 5m

12y 7m

 

Let’s just take the $50 a week example. After 25y2m, your loan is fully paid off and your 50/week totals additional repayments of $65,433 but save you $112,604.

The more you add, the better, but the biggest impact happens when you start making regular extra repayments early on.

 

  1. Pay Weekly or Fortnightly Instead of Monthly – mostly because bankers can’t math properly

There are two reasons that contribute to this working. One that is a legitimate saving as a result of paying more frequently, and one that is because bankers don’t seem to know how many weeks are in a month.  

 

The legitimate reason

This one can be a little tricky, and doesn’t always apply. For example, if you are using an offset account to receive your pay, it may not apply to you. However, if your Mortgage is separate to your day-to-day account, this can make a small difference without actually costing you anything.

This works because of when interest is applied to a home loan. I’ll do my best to explain this.

The first thing to know is that interest is typically calculated daily on your home loan. This means that if your balance at the end of the month is 0 but for the other 29 days it was $500,000, then you’ll be charged interest on $500,000 for 29/30 days and interest on $0 for 1/30 days of the month.

The second thing to know is that interest is added to your loan at the end of the month. Once interest is added to your loan, the lender will charge you interest on the balance that now includes the added interest.

The reason that paying more frequently helps is that your balance reduces throughout the month and the total interest that is added at the end of the month is less.

I’ll make a table to illustrate this, one sec…

…

 

We’ll have the monthly repayment come out on the 1st of each month, so the opening balance will be 500,000. This example uses February, the only month with exactly 4 weeks (most of the time).

February

Week

Balance: Monthly Example

Balance: Weekly Example

1

1

500000

500000

2

1

500000

500000

3

1

500000

500000

4

1

500000

500000

5

1

500000

500000

6

1

500000

500000

7

1

500000

500000

8

2

500000

499302

9

2

500000

499302

10

2

500000

499302

11

2

500000

499302

12

2

500000

499302

13

2

500000

499302

14

2

500000

499302

15

3

500000

498604

16

3

500000

498604

17

3

500000

498604

18

3

500000

498604

19

3

500000

498604

20

3

500000

498604

21

3

500000

498604

22

4

500000

497906

23

4

500000

497906

24

4

500000

497906

25

4

500000

497906

26

4

500000

497906

27

4

500000

497906

28

4

500000

497906
 

Interest

2335.890411

2330.999056

 

So, you save about 5 bucks per month, which isn’t much but over the course of the loan it saves you $3,313 – it might not be much, but better in your pocket than in the lender’s pocket!...

 

The flawed mathematic reason

The second part of this is what makes a bigger difference to you.

Using our $500,000 example, your repayments at 6.09% are 3,027 per month.

To get your weekly repayments, the monthly repayment is divided by 4, resulting in weekly repayment of $757

This math isn’t mathing! There are 4.3° weeks in a month (52 weeks / 12 months = 4 & 1/3 weeks / months) and this difference means that you are paying an extra $58 per week. I know that this might not sound like a lot, but it adds up to interest savings of $126,661 and shaves 5 whole years off your loan!

Now it’s true, this is not much different to just making extra repayments, but it’s not a bad way of automating some additional repayments without really noticing. If you don’t have the best discipline to make extra repayments, this effectively forces you by increasing minimum repayment. You can always swap back to monthly it if you want to or need the extra cash, but if you add it up, it works out to be a whole extra repayment by the end of a year.

 

  1. Refinance to a Lower Interest Rate

A caveat before I get into this one; the lowest rate is not always the best for your needs. A good broker will find you the cheapest loan that meets your needs, but the cheapest loan might not meet your needs. At the same time, the loan that you have may not be the best for your needs, even if it was when you first got it. This is because the mortgage market is competitive and different lenders will apply different discounts and release new products and policies to compete with one another. If your broker isn’t regularly reviewing your loan and overall position against the current market, you could be missing out on huge savings.

Let’s take a look at an example using a higher interest rate of 6.49% and see what the savings would be if you secured a refinance rate of 6.09%. We’ll use our 30 year, 500k home loan for the example.

Interest Rate

6.49%

6.09%

Difference

Total Interest

$636,539

$589,628

$46,911

First Year Interest

$32,285.39

$30,283.32

$2,002

 

In this example, it looks like you’re only saving a modest amount in the first year, especially after discharge and application fees. However, let’s consider the previous strategies for a moment.

At 6.49%, your monthly repayments are $3157.05
At 6.09%, your monthly repayments are $3026.75
The difference is about $130 per month

Re-investing that $130 per month as an extra repayment results in $120,827 in total interest savings between the two scenarios. At the time of your refinance, your loan term could be adjusted to 27y 10m with pretty much the same repayment you were already making!

 

  1. Regularly ask for a rate review with your lender

You might find that the bank you’re with is offering new customers a better rate than what you’re getting. This is common practice among lenders and is a way for them to attract new customers while profiting off their more passive existing customers. As a rule of thumb, in a competitive market, you would expect new customer prices to slowly go down over time.

While this doesn’t affect everyone, it is good to be aware of it because most lenders allow their customers to request a rate review every 6 months. To have a good chance at receiving a favourable rate review, you will need to know what your lender’s competitors are offering and be willing to move banks if you can’t negotiate a competitive rate.

If you’re lucky, your broker will regularly review your loan and the competitive landscape for you, giving you the ammunition needed to have a good chance come rate review time. In fact, many lenders even allow the broker to request a rate review on behalf of the customer so you may not even need to do this, resting in comfort knowing that you are already on a competitive interest rate.

 

Closing Remarks

Speak to a/your/me broker about any of this if you have questions. At the end of the day, these are your finances and you’re responsible for ensuring that you are optimising your position; this may mean taking a keen interest, learning about lending and DIY’ing it for yourself, or it may mean finding the right local broker to take care of your lending needs. I’m a strong advocate of finding good, competent professionals to support you in your endeavours and my business exists to support people so that they can go to bed each night knowing that their finance needs are taken care of properly.

I started with this topic as my first blog because this is an easy and powerful way to help people. I’m passionate about finding ways for people to save money on their loans; as an ex-banker, I’ve seen a lot of people waste a lot of their money by not knowing how to optimise their loans properly and I see an opportunity to help people!

Truly, I hope that you have gotten something useful out of this and can use the content of this blog to your benefit. As I wrote earlier, please reach out to a broker, your broker or me if you have any questions.

 

Good luck out there!


Published: 16/4/2024
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