How do I know if i’m paying too much interest?

Apart from your loan amount, a huge bulk of your mortgage repayments goes towards paying off the interest your loan has accrued.

Your home loan repayments go towards two amounts, the amount you are repaying back to the bank and the interest where the bank makes money from. No one likes paying interest and it’s the one thing that prolongs your loan being paid off sooner. So, how do you know if you’re paying too much interest?

The quickest way to find out if you’re paying too much is by asking yourself when you last reviewed your home loan. If you haven’t done so in the past 3 to 5 years (hopefully no more than that), then there’s a good chance that you’re paying more interest than you should be paying as interest rates are currently at a record low.

Those extra hundreds of dollars you overpaid could have easily helped you renovate your home, reduce your principal significantly, pay for your child’s education, or even prepare for your retirement.

Chances are that you’ve also paid too much interest over the past 2 to 3 years because rates have dropped significantly since then. You’ve probably heard already that the Reserve Bank cut cash rates several times during that period, which brought the rate down to the current record low of 2 per cent. Banks and other lenders naturally followed suit, however not all lenders applied for the full cuts which has caused a difference in what lenders are offering on interest rates. It’s not all bad news; the good thing is that you can stop overpaying now.

How do I Avoid Paying Too Much Interest?

The first step that you can take to avoid unnecessary overpayments is to speak with a mortgage broker. They can help you shop around for products that are best suited to your needs. That includes not only the most suitable interest rate, but also other features that may be important to you, such as the ability to make overpayments on the principal without penalties and having an offset account.

Shopping around before you go to your lender to negotiate is important. That’s because it will put you in a better position to ask for a better deal when you can show them that you have better options elsewhere. In most cases, they’d prefer to keep you as a client because it’s more cost-effective for them than to spend their resources finding new clients.

Another thing that a broker can do for you is review your current home loan and see if they can get you a better deal. Brokers (especially more established ones) work with a vast network of lenders and it’s very likely that they can help find you a deal that really suits you.

What’s more is that brokers can work on your behalf, not only when it comes to looking for deals, but also when it comes to applying for a loan, negotiating deals, and following up your application. This saves you a considerable amount of time and money compared to when you do everything on your own.

Written by Tiffany Gourlay.