In the past 2 months official interest rates have gone up by 0.75%. On a $500,000 loan that’s over $3,000 per year in extra interest costs.
If you’re with a major bank lender, chances are in the past 2 months you’ve received nasty letters telling you your repayments are going up. If this has or will cause you financial stress, an important 1st step it to speak with your lender to make them aware of your situation.
But what if you’re ok but concerned about the future?
Here are 5 tips to help manage your home loan.
1. Refinance your home loan
This is where you can potentially make the most savings in the short term.
You want to make sure you’re on the best deal for you, but a chat with a lending specialist may help you understand other options, like consolidating your personal debts to really lower your interest costs or your repayments.
The current rates on the market vary widely. A lending specialist will not only help you compare loan options, but will also take you through fees, all the loan features, and make sure the home loan saves you money and meets your financial requirements.
Better still, a lending specialist will do all the hard work for you and take you through the loan contract. If consolidating debts is the right move for you, they’ll also do a full budget with you to help you understand what your best move is.
For example, with a home loan refinance you could potentially save up to 1% on your home loan. That kind of saving can put you back on track and your mind at ease.
2. Make fortnightly repayments instead of monthly
Simply making repayments every two weeks instead of once a month can save you significant money.
It’s all down to a timing trick. There are only 12 months in the year, but 26 fortnights. So, you’ll end up making an extra two repayments for the year without even realising it.
Let’s crunch the numbers.
If you have an $800,000 loan for 30 years at an interest rate of 5 per cent, over the life of the loan you’ll save more than $210,000 in interest.
And you’ll pay off your loan more than five years earlier.
3. Use an off-set account
If you have a variable home loan, an off-set account can be a useful tool.
You can still use it as a regular transaction account but, just by having the money sitting there, it reduces how much interest you’re paying on your loan.
And you’ll probably get more value out of it off-setting your loan, than the interest you would earn on a savings account.
For example, your home loan interest may be 4 or 5 per cent while a savings account might earn you 1 per cent at best.
And unlike interest earned on money in a savings account, money sitting in an off-set account will not attract taxes.
So even if you had a loan interest rate of 4 per cent and earned the same on your savings, the latter would be subject to tax — so the effective earnings could be just a little more than 2 per cent if you are on the highest marginal tax rate.
If you’re thinking of an off-set, make sure you don’t end up paying for the privilege with a hefty annual fee. For example, our 5 Star Home Loan package comes with a full banking package including a free off-set feature.
4. Commit to extra repayments
This one is a given – but sometimes not easy if your repayments are going up.
Deciding in advance to make extra payments on your loan is a great strategy. Some financial experts refer to it as a “pre-commitment strategy”.
One example of this strategy is if you manage to get a better deal on your interest rate, keep paying the higher amount. You may not be able to do this every month but do it every month you can. It helps you save on interest and build a buffer if you ever need it.
Another tip is to use one-off windfalls wisely. For example, if you get a tax return or unexpected bonus, decide to put part or all of it into your mortgage.
5. Pay principal and interest
These days, most people are making principal and interest repayments. If your home loan is for your own home, this is a wise strategy as the interest is not tax deductible so you may as well pay the actual debt down faster.
If you only pay off the interest, your actual loan remains the same. You will also likely pay a higher interest rate on interest only loans, so it can be a win-win.
Hopefully we’ve given you some great ideas if you’ve been feeling stressed about rising interest rates.
If you’re in financial hardship and the above can’t work for you, it might be worth contacting your lender’s financial hardship team.
You could also ring the National Debt Helpline on 1800 007 007 to get free, independent help with managing your debt.
But if you like what you’ve read, and want to put a strategy in place, our lending specialists offer free advice and are available online, on the phone, or in person.
Simply contact us below and we’ll be in touch.
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This article is prepared based on general information. It does not take into account individual financial objectives or needs and is not financial product advice.