Top Tips to Cut Your Loan Costs

Skip the honeymoon

There are two problems with honeymoons. First, the variable rate is often higher than some of the lower basic loans available so you could end up paying more. Second, you need to clearly understand that a honeymoon rate applies only for the first year or two of the loan and is a minor consideration compared to the actual variable rate that will determine your repayments over the next 20 or so years.

Make repayments at a higher rate

Get a loan at the lowest interest rate you can and add 2 or 3 percentage points to your repayment amount. Every dollar you put into your mortgage above your repayment amount attacks the capital.

Pay it off quickly

If you take out a loan of $300,000 at 7.07 per cent for 25 years, your monthly repayment will be about be about $2,134. This equates to a total repayment of $640,126 over the term of your loan.

If you pay the loan out over 10 years rather than 25, your monthly payment will be $3,494 a month (ouch!). But the total amount you will repay over the term of the loan will be only $419,290 - saving you a whopping $220,836!

Make more frequent payments

One of the simplest and best strategies for reducing the term and cost of your loan is to make your repayment on a fortnightly rather than monthly.

Get a package

Speak to your lender about the financial packages they have on offer. Common inclusions are discounted home insurance, fee-free credit cards, a free consultation with a financial adviser or even a fee-free transaction account. Every little bit counts and you can use the little savings on other financial services to turn them into big savings on your home loan.

Consolidate your debts.

If your home loan rate starts to rise, you can be absolutely positive about one thing - your personal loan rate will rise and so will your credit card rate and any hire purchase rate you may happen to have.

Many lenders will allow you to consolidate - re-finance - all of your debt under the umbrella of your home loan. This means that instead of paying 15 to 20 per cent on your credit card or personal loan, you can transfer these debts to your home loan and pay it off at 7.07 per cent.

Split your loan

A split loan, or combination loan as they are often known allows you to take part of your loan as fixed and part as variable. Essentially this allows you to hedge your bets as to whether interest rates are going to rise and by how much.

Forgo those minor luxuries

This is the bit you don't want to read, but consider this: A typical day may include a pack of smokes ($10), a coffee and donut ($5), lunch ($12) and a couple of beers after work ($8). That's $35 a day or $9,100 a year.

Assuming a mortgage of $300,000 at 7.07 per cent over 25 years, by making $750 in extra repayments each month, you'd save more than $175,000 in interest and be mortgage free 11 and a half years sooner.

Run an offset account

Any money you have in your offset account works to offset the interest you are paying on your home loan. The best sort of offset account pays the same rate as your loan (100 per cent offset).

Pay all your mortgage fees and charges up front

Some lenders allow you to add your buying costs to the amount you borrow. While this can seem a blessing it simply adds to the principal and can slow down the time it takes to pay off your home.

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