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Interest Rates are rising?
5 TIPS on how to deal with your mortgage!
Your local bank might not like this post.
The official interest rate has gone up again, this time by half a percent.
On a $500,000 loan, that's an extra $1,600 in payments per year, if the banks pass the rate hike on in full.
Here are five tips for managing your mortgage more effectively.
Tip #1 - Make fortnightly repayments instead of monthly
"Simply making repayments every two weeks instead of once a month can save you significant money," says financial advisor Kate McCallum.
Without realizing it, you'll have made two additional payments that year.
Let's do some math.
Kate McCallum estimates that borrowers may save over $210,000 in interest payments over the course of a 30-year, $800,000 loan if interest rates were lowered to 5%.
And you can expect to complete the loan repayment process more than five years earlier.
Tip #2 - Make use of an offset account
An offset account can be helpful if you have a house loan with a fluctuating interest rate.
You can still utilize the account as you would any other transaction account, but the interest you pay on the loan will go down just because the money is there.
Also, as Kate McCallum points out, the value of this toward paying off your debt will likely be higher than the interest you would get on a savings account.
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 offsetting your loan, than the interest you would earn on a savings account, says Kate McCallum.
"For example, your home loan interest maybe 4% or 5% while a savings account might earn you 1% at best," she says.
"And unlike interest earned on money in a savings account, money sitting in an offset account will NOT attract taxes."
Tip #3 - Renegotiate your rate
Make sure you're getting the best deal with the lowest rate.
There are a lot of different rates on the market right now.
Online lenders offer the lowest variable rates, which are around 2%. (some have very tough conditions, like 40 per cent deposits).
To give you an idea, on a $800,000 loan over 25 years with a 20% down payment, the big four banks offer variable rates in the 2% range.
For a one-year loan, the lowest fixed rates are between 2% and 3%, and for a three-year loan, they are between 3% and 2%.
Di Johnson, a personal finance lecturer at Griffith University, says that you shouldn't just look at the headline rate. You should also check the fees.
Ms. Johnson says, "It's very important to look at the one-time and ongoing fees (like application fees, monthly fees, annual fees, etc.) and ask which ones can be waived."
"Really check the exit fees to make sure you can refinance in the future at a low cost."
Tip #4 - Commit to extra repayments
Di Johnson says that deciding ahead of time to make extra payments on your loan is a great plan.
It's something she calls a "pre-commitment strategy."
"It gets around what she calls our "present bias," which is our tendency to prefer options in the present over those in the future.
If you can get a better deal on your interest rate, for example, you should keep paying the higher amount.
Or, if you get a tax refund or a bonus out of the blue, you might decide to put some or all of it toward your mortgage.
Tip #5 - Pay principal and interest
Your final tip. Try to make sure you're paying both the principal and the interest on your loan.
If you only pay off the interest, your loan stays the same.
"It also has a lower interest rate than interest-only loans, so it can be a win-win," says Di Johnson.
Lastly, if you're already feeling stressed about money, you might want to contact your lender's financial hardship team.
You could also call the National Debt Helpline at 1800 007 007 to get free, independent help with managing your debt.
Be prepared, stay prepared with The Lynden Group.
Reach out to us more information on how to better manage your finances.
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