Paying less interest and fewer fees is a priority for almost every mortgage holder in Australia right now. Our current high interest rate environment (and the “fixed-rate mortgage cliff” many are experiencing) is putting pressure on millions of households, causing a renewed interest in strategies for reducing loan repayments.
Of course, finding a loan with a lower rate is an obvious approach. But what can you do if you’re already borrowing at a competitive interest rate?
One of our favourite strategies is called ‘loan structuring’, which involves optimising a loan’s features or type based on its particular purpose. By implementing intentional loan structuring strategies, borrowers can create more favourable conditions (resulting in lower repayments, a reduced loan term, and other benefits).
Let’s look at some of our favourite loan structuring strategies and tactics, for helping our clients pay less interest and fees.
If you have multiple properties, such as an investment property and an owner-occupied home, you may benefit from operating separate loan accounts for each.
This strategy is important because the interest on your investment property loan is usually tax-deductible, whereas the interest on your owner-occupied home loan is not.
By keeping these debts distinct, your accountant can calculate and maximise your tax-deductible expenses. Please note, this isn’t tax advice. Please speak to your accountant or tax professional for more information about this strategy.
Second, even though these loans are held in separate accounts, they can still be secured against the same property. This strategy offers two significant benefits:
- It potentially circumvents the need for Lenders Mortgage Insurance (LMI), a cost that can add up substantially.
- By securing multiple loans against one property, you might be able to negotiate a lower interest rate based on overall loan-to-value ratio (LVR).
Please speak to us if you’d like to learn more about this strategy.
Your loan’s term, or the ‘number of years you have to pay the loan off’ (e.g. 25 years) influences the amount you must pay back each month and the total amount of interest you’ll pay.
Generally, a shorter loan term means higher monthly repayments, but less interest paid over the life of the loan.
A longer loan term reduces your monthly repayment obligations and reduces pressure on short term cashflow. However, it also results in more interest paid over time. This option may be more suitable in our current environment where short term cash flow is a priority.
The interest payment type you choose for your mortgage — either principal and interest (P&I) or interest-only (IO) — can have a substantial impact on your overall financial strategy, particularly in a high-interest rate environment.
Each option has its own set of benefits and implications that should be carefully applied to your financial goals and circumstances.
Principal and Interest Payments:
With P&I payments, you’re paying off both the interest and the principal loan amount. This approach gradually reduces your overall debt and builds equity in your property. When paying P&I, your repayments will be higher at the start of the loan. However, this will decrease your total interest paid.
With IO payments, you’re only required to pay the interest on the loan. This means your repayments are smaller, and can be beneficial for investors who can deduct the interest as a tax expense or homeowners needing temporary financial flexibility.
However, it’s important to remember that during the interest-only period, you’re not reducing the principal amount. This means that the overall cost of the loan may be higher.
Please note that this is not financial advice. Please speak to a qualified professional for more information about this strategy.
Choosing the right type of interest rate for your mortgage — fixed, variable, or a combination of both in a split rate loan — can significantly impact your financial flexibility and the total cost of your loan.
A fixed-rate loan secures an interest rate for a specific, agreed period (usually between 1-5 years). This means that you’ll have a clear understanding of what your repayments will be (and make budgeting easier). This can be particularly comforting in a high-interest rate environment, as it shields you from potential rate hikes.
However, fixed-rate loans often come with less flexibility, such as limits on extra repayments or penalties for breaking the fixed term early.
Variable-rate loans fluctuate based on market conditions. This means your repayments can go up or down. The benefit here is flexibility — variable loans typically allow for additional repayments without penalty, and you may have access to features like offset accounts or redraw facilities. However, the uncertainty of rate changes can make budgeting more challenging.
Split Rate Loans:
A split rate loan allows you to divide (or “split”) your mortgage so that part of it pays a fixed rate, and the other pays a variable rate. This approach lets you enjoy the security of fixed repayments on a portion of your loan whilst being able to pay more off, faster, on the variable part.
The decision between using a deposit or equity to secure a mortgage, and understanding the implications of cross-collateralisation, are critical considerations in loan structuring.
These choices can have long-term impacts on your financial flexibility and the cost of your loan.
Using a Deposit:
The larger your deposit, the smaller your loan needs to be, which can result in lower interest payments over time. A substantial deposit also reduces the likelihood of needing Lenders Mortgage Insurance (LMI), which is typically required if you borrow more than 80% of your property’s value. However, accumulating a large deposit can be challenging and may delay your property purchase.
Using equity from an existing property to secure another loan can be a powerful tool, especially for investors looking to expand their portfolios. It allows you to leverage your current assets to finance further investments without needing a cash deposit. However, it’s essential to be cautious, as this increases your overall debt and may expose you to higher risks, particularly in a volatile market.
Cross-collateralisation occurs when more than one property is used as security for a loan. While this can enable you to access more funds, it also intertwines the fates of these properties with the lender. It’s generally advisable to avoid cross-collateralisation to maintain greater control over your properties and limit your risk exposure.
An offset account is a savings account linked directly to your mortgage. The balance in this account is ‘offset’ against your loan balance, meaning you are only charged interest on the difference.
Benefits of using an offset account:
- Interest savings: The primary benefit of an offset account is the potential interest savings. This is advantageous in a high-interest rate environment.
- Flexibility: Funds in your offset account are usually accessible, providing you with liquidity and flexibility. You can deposit and withdraw funds as needed, making it an excellent option for managing day-to-day finances while still reducing interest costs.
- Non-taxable: Unlike earning interest on a regular savings account, the interest saved by using an offset account is not considered taxable income. This makes it a tax-efficient way to reduce your mortgage costs.
One often-overlooked strategy is engaging a mortgage broker with a premium or elevated status with a lender or a group of lenders.
This strategy can unlock unique advantages and opportunities that aren’t typically accessible when dealing directly with lenders.
What does it mean to have “premium status”?
Premium status refers to the elevated standing a mortgage broker has with lenders, often due to the volume and quality of loans they process. Brokers with this status often have access to exclusive deals, competitive rates, and more flexible lending criteria.
Benefits of using a premium status broker:
- Access to more attractive loan conditions and products: Brokers with premium status often have access to exclusive loan products or interest rates that are not available to the general public. This can result in more favourable loan terms, which can be especially beneficial in a high-interest rate climate.
- Negotiation power: With their established relationships and volume of business, these brokers are in a stronger position to negotiate with lenders on your behalf. They can often secure lower rates, reduced fees, or more favourable terms on your mortgage.
- Streamlined processing: Premium status brokers typically receive prioritised service from lenders. This can mean faster loan approvals and more efficient handling of your application, saving you time and reducing the stress involved in the loan process.
- Expert guidance: These brokers have a wealth of experience and knowledge, enabling them to provide expert advice tailored to your specific financial situation. They can guide you through the loan structuring process, ensuring that your mortgage aligns with your financial goals.
Can we help you pay less mortgage interest and fees, even if you already have a low interest rate?
These strategies can be effective, but it may take expert implementation to extract the most value from them.
If you’re looking for an expert team (and a broker with premium status) to help you pay less mortgage interest and fees, request a Free 30-Minute Finance Strategy Session during which you will…
- Get a better understanding of the lending options available to you, even if you suspect you’re paying a very competitive interest rate already
- Discover ways to save money on interest, fees, and charges that are specific to your unique situation
- Get an up-to-date picture of the lending landscape including rates, conditions, and how to structure loans
- Learn about our process to find you a better loan that could save you thousands.
This no-obligation free session will be held with one of our experienced mortgage brokers.
Please be assured this will not be a thinly disguised sales presentation. On the contrary, you’ll receive our best strategic advice, specific to your situation, so you too can accumulate multiple properties without sacrificing your current lifestyle and accelerate your progress towards wealth.
Please note, the numbers and assumptions listed in this article are for educational purposes only. Individuals should seek specific advice pertaining to their unique situation and the real estate market before making any decisions.
Trilogy Funding Two is a corporate credit representative (Representative Number 506131) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237)