When it comes to total interest costs over the life of a loan, a low interest rate can make the world of difference on your back pocket.
Let’s compare two interest rates: a fairly low 2.50% p.a and 3.50% p.a.
That 3.50% p.a. might seem high compared to the low rates in these tables, but the reality is many people are still paying even more than this and aren’t aware of how much they could be saving.
The table below shows the difference in interest costs between those two interest rates over the course of a 30-year, principal and interest loan.
Calculations made via Savings.com.au's Home Loan Comparison Calculator.
Based on these calculations, that 1.00% difference - which is a fairly significant - can result in you paying over $100,000 less in interest over the life of the loan.
Finding a good home loan isn’t too tricky thanks to the wealth of information at your fingerprints, but you should still take a fair amount of time to compare a number of them by asking the following questions:
Is there an introductory rate? Many ‘low rate’ loans actually have introductory rates with higher revert rates.
If it’s a fixed rate, what’s the break cost? Refinancing from a fixed rate home loan can be expensive, so check the fees on the loan before committing.
What are the fees? A low advertised rate can have a high comparison rate, due to high ongoing and upfront fees.
Can you make extra or more frequent repayments? Having the flexibility to do this could help you save thousands more over the life of the loan.
Is it interest-only? Interest-only loans can be much cheaper to start with, but once the interest-only period ends repayments can skyrocket
Home loan features such as offset accounts and redraw facilities can help borrowers save on their interest costs.
However, property investors may favor an offset account over a redraw facility as an offset account operates as a separate facility to the Investment loan. This means that withdrawing funds from the offset account for personal use does not distort the loan’s purpose, maintaining the tax-deductible capabilities of the loan.
For example, using a redraw facility to withdraw $50,000 from a $500,000 investment home loan to renovate your owner- occupied home could result in the ATO deeming the investment loan to be only 90% tax-deductible. There is no risk of that with an offset account.
Home loans with offset accounts often have higher interest rates, so borrowers should consider their financial position before committing.
While monthly repayments might be the default option for the loan you are after, making repayments fortnightly or even weekly can help you save on interest and pay off the loan earlier. This is the case so long as the value of these regular repayments are at least half (fortnightly) or a quarter (weekly) of your monthly repayments.