If there is anything that the Covid-19 restrictions has taught us, it is that we can never be too prepared.
The sudden lockdown of our economy saw almost a million
Australians lose their source of income and resort to government assistance to afford their basic living expenses. Additionally, it is estimated that 6.6 million Australians are enrolled in the JobKeeper payment scheme. Simultaneously home owners with a mortgage had to seek assistance from their lenders, whether it be a temporary hold on their repayments or a significant reduction in the payment amount. It is fair to say many of us were not prepared for the sudden impact of Covid-19 and the longstanding effects it will have on our finances.
A lesson we can draw from Covid-19 is the importance of being in front with repayments on your home loan. Should our economy take another hit in future, this can help each of us feel prepared and lessen the impact of the blow.
When it comes to a decision as big as a home loan, knowledge is power. It can assist you to make an informed decision and understand all of the different financial terms being thrown around.
To get ahead on your home loan, we recommend you consider
the following options:
1. Skip the honeymoon period
Many lenders use the honeymoon phase as a marketing tool to get clients in the door. It is important for borrowers to understand that the cheap rate offered is only fixed for the first year or two of the loan. The lender will then switch you to a higher variable rate of interest for the remaining duration of the loan, which will considerably impact the repayments for the next 20-30 years of the loan.
2. Make more frequent payments
Splitting your loan in two and paying fortnightly instead of monthly is an easy way to save some money. There are 26 fortnights in a year and 12 months, essentially by paying fortnightly you are making the equivalent of 13 monthly payments in one calendar year which in the long term can make a big difference to the interest payments.
3. Hit the principle early
We often see clients who are new to the home loan game opting for an interest only loan to reduce their initial repayments. The problem with an interest only loan is that the principle amount is not reducing at all. When you cease paying interest only your loan term is shorter, therefore you have higher repayments of your principle in a shorter amount of time. To combat this, you need to try everything you can to get some of the principal repaid early and you’ll notice the difference. Every dollar you put into your mortgage above your repayment amount attacks the capital, which means down the track you’ll be paying interest on a smaller amount. Extra lump sums or regular additional repayments will help you cut many years off the term of your loan.
4. Consolidate your debts
An easy way to get on top of paying your loans is to reduce any impact an interest rate rise will cause. If the interest rate rises on your home loan, it is more than likely going to increase on your personal loan and credit card too. The issue with this is that your interest rate on these loans is often far higher than your home loan. Many lenders will let you combine your loans under your home loan. This means instead of paying 15-20 per cent on your personal loan and credit card you can pay it off at 5 per cent (or whatever your home loan is).
Our final suggestion is to make small additional payments of $20.00 (or whatever you can afford) each week. This is a simple way to get you ahead on your loan in the long term. Any extra repayments or lump sum payments you can make will only benefit you in the long run.
If you would like to discuss your financial position or your current home loan, please contact our office. Our financial team is dedicated to providing you with the best possible outcome.