Pay off your home loan sooner

Matt: Hi Kate

Kate: Oh, Hi Matt.

Matt: Hey, I hear you're selling your house?

Kate: Yes, it went on the market last weekend. We were open for inspection on Saturday and Sunday, so we've been trying to keep the place tidy. While you're cleaning one room the kids are destroying another. It's like it's their mission to stay one room ahead of you all the time.

Matt: Have you bought somewhere else already?

Kate: Yes, just around the corner. It has an extra bedroom, a large family room and a decent backyard for the kids.

Matt: So, bigger house, bigger home loan?

Kate: Yeah, but things have changed a lot since we bought our first place. If I knew then what I know now about home loans, we'd have it paid off by now.

Ben: You can't say that.

Kate: Says who? Hi Ben, what are you doing down here? Ben this is Matt. Matt, Ben. And why can't I say that?

Ben: It's hypothetical. How do you know you could have paid it off?

Kate: Matt, Ben's my painful brother, and a lawyer. As if you couldn't guess.

Ben: You love it. Besides it's still hypothetical.

Kate: Whatever. Where was I, Matt? When we bought the flat we just went to the same bank that I had a credit card with. Seemed simple to stay with someone we knew. But things have changed a lot since then. There are so many banks and other lenders to choose from. This time we shopped around big time.

Matt: Who did you end up borrowing from?

Kate: We stayed with my bank (laughs). We spoke to everyone, but really, when it came to the crunch they gave us the best advice. And my bank has always treated me well in the past. I know it's not very popular to say…

Ben: I don't like where you're going with this.

Kate: Let me finish.

Ben: Any minute you gonna say something you can't substantiate. I can feel it.

Kate: I was just about to say that our home lender knew us, listened to what we were after and then provided us with the right home loan.

Ben: Ok. That's fine. I'll let that go.

Kate: Oh, Matt did I mention my brother needs to get a life?

Matt: What about the home loan rate?

Kate: There's more to a home loan than just the interest rate. It's also about getting advice from people you trust.

Matt: Sure. Sure. But what about the home loan rate? Did you look at one of those loans where you pay a lower interest rate in the first year? They look really good.

Kate: Yeah, we looked into those. They do look good, but they're not for everyone. They're really for first home buyers. If you're just starting out you might need a cash flow break in your first year to buy other things, like curtains and floor coverings and stuff like that.

Matt: I guess you're a bit more established than that?

Kate: Well, yeah, and our home lender knew that so she advised us to look at other options.

Kate: She suggested that there were a heap of other ways to reduce the interest payments or the duration of the loan. You'd be amazed at what you can do.

Matt: Oh yeah. Like what.

Ben: Stop buying extravagant shoes.

Kate: Says Mr. Armani here. When we borrowed for the new house we worked out how much we owed on credit cards and the car loan and we borrowed extra to pay those off. So we shifted our debts from the cards where we were paying 17 or 18% p.a., to the home loan rate, and same for the car. And now we can keep track of things more easily because we make just one payment each fortnight for the whole lot.

Matt: Do you really save that much?

Kate: Well we owed $4000 on credit cards, so the monthly payments were about $80. Now we pay about $30, so the other $50 is paying off the home loan.

Matt: Sure, but does that make much of a difference, really.

Kate: Well on an average loan like ours-$230,000-paying $50 on top of our minimum scheduled repayment will take 3 years off our loan term and save us $44,000 in interest payments. That's a whole lot of extravagant shoes, and an extra $50 a month isn't even latte money.

Ben: You going to need to qualify yourself. You need to say, "Matt, this is an estimate and is assuming a standard variable rate of 7.82%p.a and a loan term of 30 years, and that the interest rate doesn't change over the loan term." Or something like that.

Kate: Oh, Ben. What happened to you? You were such a lovely boy. What did they do to you in law school?

Ben: I'm serious.

Kate: You're seriously annoying. Anyhow Matt, like I was saying, it's more about the cumulative effect of a number of these things.

Matt: What else have you done?

Kate: Well our home lender put us onto a mortgage offset account.

Matt: What's that?

Kate: It's my favourite thing in the world at the moment. You know if you have a savings account how you earn little or no interest on it. And it's taxed.

Ben: And it may be taxable!

Kate: And it may be taxable. Well a mortgage offset account basically gives you no interest on your savings but offsets the amount you have in that account against your home loan.

Matt: Run that by me again.

Kate: Say for instance you have a home loan for $100,000 and you have savings of $5000 in a linked offset account, the bank will only charge you interest on $95,000. So they treat your savings as if you have these funds in the home loan account. And if you spend the 5 grand they go back to charging interest on the full $100,000. The bonus is that you don't pay any tax on the interest you save on your loan.

Matt: I've never heard of that. But you do miss out on the interest.

Kate: Yeah, but you save yourself whatever the interest rate on your loan is. The standard variable rate is around 7 or 8%p.a. at the moment.

Ben: 7.82%

Matt: That's pretty cool.

Kate: Our home lender suggested we look at fortnightly repayments instead of monthly, too. You wouldn't think it would make that much difference but you'd be amazed. If you halve your monthly repayments and pay that amount fortnightly then you are actually repaying the equivalent of 13 monthly repayments each year. And it compounds.

Matt: How's that?

Kate: Well there are 12 months in a year, but 52 weeks or 26 fortnights. The best bit is that you don't even notice it if it comes straight out of your account via direct debit.

Matt: Yeah, but does it really make that much difference?

Kate: On our loan of $230,000, because we pay fortnightly, we will take 7 years and 2 months off our home loan term and $105,000 in interest payments. That's your queue, Ben. Ben: Assuming a standard variable rate of 7.82%, a loan term of 30 years. Oh, yeah, and…

Matt: …it's only an estimate that may change with interest rates, I know. It's still a lot to save though. I'm amazed. Anything else?

Kate: Well the other thing you can do is make lump sum payments on your loan, which reduces the principal. You know if you get a gift, or a tax return, or a bonus from work, or a share dividend… well, anything like that, you should pay it straight into the loan account. It was a bonus so you're not going to miss it.

Matt: That's no fun. We always use our tax return to go on a holiday or something.

Ben: If you pay it against the loan every year instead you could have yourself a real "debt free" holiday at the other end.

Matt: Anything else? I wish I'd brought a pen.

Ben: Here, borrow mine.

Kate: That'd be right. Where do you keep a pen in a hoody? One more, Matt. A no-frills loan.

Matt: No-frills

Kate: If you want a loan that doesn't have all the bells and whistles. You know: no redraw facility, no cheque book, no fixed terms and all that. You know, a basic loan without extra features you may not need the banks will often have a loan with a lower variable interest rate.

Matt: How much lower?

Kate: 0.6%p.a. off the Standard Variable Rate is pretty common.

Matt: So how much could you save on all those things.

Kate: Well you can't necessarily have all those things together but you can certainly combine some of them.

Matt: Come on, quit teasing. How much?

Kate: Sure you wanna know? It could make you cry.

Matt: Course.

Ben: Careful sister. I'm listening. Kate: Well, on our $230,000 loan, if instead of the minimum scheduled repayment we pay an extra $50 a month, make fortnightly repayments and offset it against the $20,000 that my grandfather left me. All up we take about 11 years off a 30 year loan. And we save about $170,000 in interest. That's based on the current standard variable rate of 7.82%p.a.

Ben: You need to bear in mind that this is an illustration only and the savings amount will change if the interest rate or any other variable changes.

Kate: Matt, say good-bye to Ben. He is leaving now. Aren't you Ben? Mr Fun buster QC. Oh, and why don't you pick yourself up a personality while you're out shopping?

Ben: See you guys. Just call if you need, sis. You know you love me.

Matt: That's incredible. I can't believe that. I really am in shock.

Kate: Yeah, sorry about him.

Matt: No, I mean the amount you can save off your home loan.

Kate: It isn't rocket science. It's all there on offer from the banks. You just need a home lender who listens and asks you the right questions. Then you end up with a home loan that matches your capacity to repay, and more importantly, that suits your needs.

Matt: So who is it?

Kate: Who?

Matt: Your secret bank?

Kate: Oh, no secret. ANZ.

Matt: ANZ!

Kate: That's right, ANZ.

Matt: Oh, yeah. They were Money Magazine's Home Loan Lender of the Year - I remember now.

Kate: They also listen to your needs, so you'll end up with the right home loan that works for you now, and in the future.

Matt: I'm going to call them. Should I drop your name? Are you on commission? (Both laugh)

If you're interested in finding out more information, talk to ANZ's dedicated mortgage experts on 1800 035 500, 8am to 11pm (AEST), seven days a week, drop into your local branch or we can come to you.