Minimise Mortgage Pain
6 August 08
There are ways to minimise mortgage pain and safeguard your
home equity.According
to a recent study, six out of 10 people who bought their first home in the past
three years are having trouble meeting the mortgage repayments. Some, in outer
suburbs of capital cities and regional centres where home prices have fallen,
owe more to the bank than their house is worth.
First-home buyers aren’t the only ones feeling mortgage stress. Interest rates
have risen 12 times in six years – including twice this year – and the rate on
home loans is approaching 10%, the highest in more than a decade. If you
borrowed $300,000 just three years ago, your monthly payments would have soared
by more than $400. So the big question facing many owners is how to minimise
the pain of paying off a mortgage.
First, make sure your loan has an ‘offset facility’ and have your salary or
wages deposited directly into the loan account. The benefit of the offset
facility is that for any money you deposit, you won’t be charged interest on an
equivalent amount of the loan. If you pay an extra $100 into the account for a
day, for example, you pay no interest on $100 of the loan for that day. By
paying your salary into the account and withdrawing money as you need it, you can
save thousands and reduce the term by months, even years. You may find a
cheaper interest rate on a home loan without an offset facility and other
features, but often it will cost more in the long run.
If you’re on a monthly repayment schedule, consider paying half that amount
fortnightly instead; it’s equivalent to making an extra monthly payment each
year, so it will draw the debt down faster. You should also take the
opportunity to make a lump sum repayment if you have a cash windfall from an
inheritance, a bonus at work, a tax rebate or even a win at the races.
When rates fall, and there is speculation this may happen next year, maintain
the same repayments and you’ll pay off the loan earlier. This way, if rates
rise again after a respite, you’ll also have built up a buffer to protect you
in case of short-term unemployment or other setbacks.
Another basic rule is to review your home loan and make sure you’re getting the
best possible deal. Look not just for the lowest interest rate but also for
important features such as offset and redraw facilities, and no penalty for
early repayment.
One option is to convert from the variable rate to a fixed one, which can
provide some certainty. For the contracted period your repayments will stay the
same, whatever happens on Wall Street. Fixed-interest loans are normally taken
out for three or five years; if you want to average out the risk, you can
‘split’ a loan so that it is part fixed and part variable.
If you need a credit card, choose one with the longest interest-free period,
use it for your daily needs and pay the balance before the due date. This takes
some of the load off the mortgage by leaving your pay in an offset account a
bit longer. You can also save on fees and charges by banking online. If you have
other debts, consider increasing your home loan to pay them off, as interest on
a home loan is lower than for credit cards or personal loans.
But the best way to reduce the cost of a home loan is to repay more than the
minimum each week, fortnight or month. If you repay an extra $10 weekly on a
$300,000 loan over 25 years, assuming a rate of 8.9%, you’ll save more than
$30,000 in interest and slash nearly 18 months off the loan period. To check
the potential savings, use the calculator at www.infochoice.com.au.