As we all watch mortgage rates climb higher still, you’d be forgiven for trying to find ways to save some money each month.

There is only so far budgeting and cutting out luxuries will get you.

Sometimes, you might feel like a more drastic saving plan is needed.

Part of that exploration might include looking for ways you can save on your mortgage. Recently, we’ve had some queries about interest only loans so thought we’d provide greater detail about what they are along with some ways you might be able to save money on your mortgage.

What Is An Interest Only Loan?

Well, kind of like the name sounds, an interest only loan is a type of mortgage where you only make payments towards the interest portion of your home loan. You don’t make any repayments towards the principal portion of the loan. For this reason, interest only loans are for a fixed term and are usually approved for no longer than five years.

They also carry a large number of restrictions due to the intensified risk of debt and house prices in the current market. That means lenders need a really justified reason for allowing interest only lending right now, and some don’t even offer it

Can You Save Money With An Interest Only Loan?

So, can this type of loan save you money?

Well, it might seem like they are an option to reduce costs in the short term as the actual payment amounts will be lower. However, you will actually end up paying more in the long term as the interest is always calculated based on the principal amount of the loan. So, because the principal is not reducing as it would in a standard mortgage repayment, you will end up paying more interest over the term of the loan.

Usually, an interest only loan is more suited for property investors who may be able to claim some of the interest as a tax deduction. But, they can also be beneficial for first home buyers who are looking to make the first year of repayments more manageable or homeowners who are looking to sell their property soon.

Other Ways To Save On Your Mortgage

If an interest only loan is not necessarily the answer, what other ways are there to potentially save on your mortgage costs? Well, here are some suggestions:

Talk to the Experts

The first piece of advice we can offer is to talk with a respected mortgage broker like the team here at Mortgage Suite. That way, we can give you tailored advice based on your individual financial situation. This includes chatting about your current mortgage (if you have one) and what your future plans entail. Then, we can give you informed advice about the best options for you and your family.

Shop Around

Sometimes a different lender might be able to provide you with a different rate or a better incentive than your current lender. So, it pays to shop around to see what kind of deal you can get. A mortgage broker can help you do this and can also recommend the best potential option for your individual needs.

Negotiate

There is no rule to say you need to take the first interest rate offer you are given! You can try to negotiate a better rate or have your mortgage broker negotiate on your behalf. Often, if you have a good credit rating and strong financial history you may be able to secure a better deal.

Fixed or Floating

As we’ve discussed in the past, there are merits and drawbacks for both floating and fixed options. Fixed mortgage rates give you consistency and certainty about what your repayments will be, this can help you to budget better. However, floating rates can work if you have a variable income where you might be able to put more of your mortgage some months or if you want to capitalise on any changes in the market.

Loan Structure

The structure of your loan can sometimes be modified to create a better deal for your current situation. That can include modifying the term of it, splitting it into different portions with different interest rates, or even splitting some between fixed and floating rates.

There is not one set structure that suits everyone, so have a chat with your mortgage broker about what might be the best option for you.

Use Offset Accounts

Some lenders offer offset accounts as part of your mortgage package. Basically, any money you have in those accounts is offset against your mortgage balance which can reduce the amount of interest you need to pay. Double check with your bank if this could be an option for you.

Be Mindful Of Fees

Make sure you are aware of any fees associated with your mortgage and try to minimise incurring any. Some lenders will charge a fee if you make additional repayments or if you break a fixed term rate. There can also be penalties if you miss a payment, so it always pays to be proactive and contact your bank if you think you won’t be able to pay on time.

Regularly Review

Take the time to periodically review your budget and financial goals. Then, chat with your mortgage broker to ensure that they are in line with your current mortgage structure and adjust your strategy if your income, expenses or personal circumstances have changed.

Could You Be Saving Money?

The Reserve Bank is predicting that pockets of household financial stress are likely to grow in the medium term due to rising debt servicing burdens. Loan arrears have been steadily increasing in the past year, but most households have been able to manage to date by cutting discretionary spending.

What is noticeable though, is that mortgage holders have been missing repayments on other debt at a greater rate, suggesting that there are debt servicing strains out there. [source]

So, it is only natural that mortgage holders might be seeking ways to save money as 2023 comes to a close. If that sounds like you, then we’d love the opportunity to chat about how we might be able to help. Get in touch with the Mortgage Suite team today for an obligation free discussion about what 2024 could look like for your mortgage.