DAVID KOCH: Four ways to hack your home loan as the Reserve Bank won’t help you out any time soon

The Reserve Bank is not going to save borrowers by cutting interest rates anytime soon. That is the very clear message from RBA governor Michelle Bullock this week.

But rather than wait for a future official rate cut to ease the cost-of-living crisis it’s now up to us to negotiate our own rate cut. Yep, now is the time for us to take responsibility for our loan repayments.

Inflation is staying too high because governments are spending too much money which is pushing up costs and soaking up jobs. Some optimistic economists were predicting one rate cut before the end of the year. But that has been rejected by the RBA and it is unlikely to move until well into next year.

Since the rates tightening cycle began in May 2022, a borrower with an average loan size of $626,000 is potentially paying $1619 more each month. That is financially crippling.

Here are four ways to cut your loan repayments. I can almost guarantee they will deliver at least a 0.25 per cent cut in your current repayments.

Ring your lender and ask for a discount on the interest rate.

If you’ve never asked your lender for a better interest rate, do it right now.

Check the interest rate you’re paying on the home loan. If it’s, God forbid, above 7 per cent then your lender is playing you for a sucker. The average variable home loan rate is around 6.5 per cent.

Some of the rates available from the big four banks show the average difference between front-book (new customer) and back-book (existing customer) home loan rates is a whopping 1.96 per cent. Existing loyal customers are being treated like mugs.

A person with an owner-occupier $750,000 loan could be saving $1008 a month if they switch from a rate of 8.54 per cent to 6.58 per cent.

All borrowers have to be sceptical of their home loan interest rate and compare it against what their lender, and other lenders, are offering new customers. If you’ve been with your lender for more than a couple of years, there’s a good chance you’ve fallen on a higher back book rate and are paying more than you need to be.

Because of the property boom your rate should come down as your equity goes up

The general rule of thumb is that the more equity you have in your property, the better the interest rate you’ll get from a lender. Over the past few years, many people who took out a loan based on a small level of equity in their property would now have a much larger stake given Australia’s property boom. And that could mean a better interest rate.

Lenders base your home loan rate on your loan-to-valuation ratio — the size of the loan against the value of the property. Interest rates for borrowers with an LVR of 50 to 60 per cent could be up to 0.4 per cent less than some of the rates on offer for borrowers with an LVR of 80-90 per cent.

For a property valued at $500,000, that could be a difference of $1015 on a borrower’s monthly repayments.

The national median dwelling value was 32 per cent higher in June 2024 compared to May 2019, according to figures from CoreLogic, meaning a large number of Australian property owners could be sitting on untapped equity.

Use that increase in equity to get a better rate.

Put savings into an offset account

If you keep a decent balance, an offset account has the potential to help you save money in loan interest and pay off your mortgage sooner. Rather than a normal savings account, an offset account is the perfect place to keep that emergency fund for unexpected bills or any spare cash. It’s a great incentive to save. And unlike regular savings accounts, you won’t pay tax on the interest you offset.

Having just $25,000 in an offset account for a $500,000 loan with an interest rate of 6.19 per cent could reduce your loan term by three years and 1 month and save more than $110,000 in interest over the life of the loan.

Switch to fortnightly repayments

Making a small change to your repayment schedule, could save homeowners tens of thousands of dollars and pay off their loans faster.

A person with a $600,000 loan could save over $160,000 in interest over the life of the loan and cut down their loan term by over five years if they were to switch to fortnightly payments instead of monthly.

You’re not just paying slightly more; you’re paying it back early. You’ll need to tell your bank that you want to pay half of your monthly repayments fortnightly, because if you simply switch to a fortnightly repayment plan, this could be a smaller payment amount, and then this hack might not work for you. For example, if your monthly payments are $3694 you will want to pay $1847 per fortnight. This means you’ll be paying an extra $3694 each year, which will cut down your principal and interest owed to the bank.

David Koch is the economic director at Compare the Market