Taking on a mortgage for 25 years can be daunting but there are ways to get ahead.
Decades of low inflation and a steady economy mean we now have a generation of home loan borrowers who have never experienced double-digit interest rates – much less levels pushing towards 20 per cent.
But just as home buyers in the 1980s could only dream of interest rates below 10 per cent, smart borrowers today would be wise to consider ways to future proof their loans against potential future increases.
Build a Buffer
Chances are, if you’re one of the many borrowers making more than the minimum repayment on your mortgage, you’re already on your way to building a security buffer. Not only are you paying your loan off more quickly, and saving a swag of interest over the life of the loan, you’re building extra equity in your home that could come in handy later.
Let’s say you’ve just taken out a $400,000, 25-year loan at an interest rate of 4.5 per cent. Your monthly repayment would be $2,223, according to our repayment calculator. If you were able to lift your repayments to $2500 a month, you’d not only cut almost five years off your mortgage and save about $55,000 in interest over the life of the loan, you’d be squirrelling away a nest egg of almost $300 a month.
Making weekly or fortnightly payments could also get your mortgage down faster and is a simple change that you shouldn’t feel too much in the pocket.
If some time in the future you couldn’t pay your mortgage – because interest rates had gone up, or because you were taking time off work for a baby or to pursue a personal project – you have, in effect, pre-paid some of your mortgage payments. This could put you in a better position to negotiate a repayment “holiday” or reduced repayments for a period of time.
Use Windfalls Wisely
Putting unexpected windfalls into the mortgage can also be a great way to future-proof your loan. If you receive a bonus at work, why not put part or all of it on the mortgage rather than frittering it away. Ditto for inheritances, tax refunds and any other money you don’t normally use to live on.
Take Stock of Your Finances
It’s worth considering where you can find a few extra dollars a week to put into your mortgage too. Do you really need two skinny lattes a day when you’re working, or could you survive on one? Are you getting the best deal on costs such as electricity, home and contents insurance and your mobile phone?
Doing a stocktake of where you’re spending your money, and where you could spend it better, is a great way to free up extra cash for the mortgage.
Getting a fixed interest rate on part or your entire loan can also help protect you against future rate rises by providing time and certainty to plan and get your budget in order. But remember, with fixed rates you can’t make additional repayments so it’s best to get an expert to help you work out what’s best for you.
Consolidate Your Debts
Another strategy to consider is consolidating your debts into your home loan. While it may sound counter-intuitive to be increasing your mortgage, repaying all your debts at the lower mortgage rate could help you reduce them more quickly than paying expensive interest rates on things such as credit cards.
The key to success here is paying off those debts as quickly as possible by maintaining or increasing your total repayments. Things can quickly go pear shaped if you go on a spending splurge or pay only the minimum amount so that you’re stringing those other borrowings out over 25 years.
What steps have you taken to ensure you’ve future proofed your home loan? Tell us about it in the comments below.