Is the mortgage monster heading down your front path? If it is, it’s time to put some strategies in place to ease your financial burden. Here are our top 10 tips for beating mortgage drain.
1. Make more repayments
You may think that lenders call all the shots when it comes to setting your home loan repayments but you can have your say. Simply setting your repayments to fortnightly (or even weekly) rather than monthly can see you mortgage being slashed over time.
Nicole Pedersen-McKinnon author of Halve Your Debt and Double Your Freedom — Without The Mumbo Jumbo says the key is to make the calendar work for you. She says although there are 12 months in a year, there’s not just double that number of fortnights, but double plus two: 26. So if you very simply make half your required monthly repayments fortnightly, you will be ahead by a full month at the end of the year.
Likewise, if you get your hands on a lump sum, perhaps a hefty tax return or an inheritance of some sort, whack it onto your mortgage and watch the balance owing go down and hence the amount of interest you will have to pay each month. No matter the home loan, interest is calculated on a daily balance and charged monthly in arrears. The more often you throw money into your mortgage, the more interest you save.
2. Keep paying at your old interest rate
While recent times have seen interest rates drop, having an effect on your monthly repayment amount, many financial experts advise home owners to maintain their existing mortgage payments (whenever a rate drop occurs) in order to save thousands in the long run. Pedersen-McKinnon advises to try to never to decrease your mortgage payments. “If the rate falls or you remortgage to a better deal, maintain them at exactly the same level,” she says.
3. Get the right home loan for you: refinance your loan
Is your loan full of hidden fees and lots of gadgets you don’t use? Maybe it’s time to look at refinancing to a better option to suit your needs. Make a list of features you’d like (and those you don’t need) and speak to your lender or a mortgage broker to see what’s available in the market.
4. Cut back on personal spending
It’s true, cutting back even just a little on your personal spending can help to make paying your mortgage easier. Bring your lunch to work, cut out those afternoon coffees, use the local library and similar resources and travel locally rather than heading overseas this summer. Every little spare bit of cash helps.
5. Switch to a fixed rate
On a tight budget and prefer to know the exact amount you’ll be paying each month? Then it might be time to think about fixing the interest rate on your home loan. Want to hedge your bets? Then consider fixing a certain proportion of your home loan only. But before your make any decisions, be sure to seek financial advice regarding your personal situation.
6. Renegotiate your interest rate
The home loan market is constantly changing so if you’ve had your loan for a number of years, it might be time to try and renegotiate your current interest rate. Talk to your lender and see what they can offer.
7. Ask your lender for help
If you’ve lost your job or taking time out to look after your baby, ask your lender about taking a “pause” from your home repayments. Lots of loans offer this facility but beware it could extend the life of your loan, increase your loan amount (as deferred interest will be added to the loan balance) and may only be for a short period (usually three-to-six months) of time.
You can also reduce the amount of your repayments if you are struggling, by:
- extending your loan term;
- changing to interest only repayments; or
- renegotiating your interest rate (as discussed above).
Talk to your lender for more information on the above options. Most lenders also have hardship provisions for their customers in trouble so do seek help if you need it.
8. Be prepared
Planning on starting a family or undertaking a renovation on your property? Then be sure to plan ahead for the impact the loss of income or extra expenses will have on your mortgage commitments.
And there are other ways you can use your mortgage to your advantage. For example, if you have an offset account linked to your home loan, use it to its full capacity by having your salary paid into the offset account that runs alongside your mortgage. Then use a credit card for all your monthly expenses (but be careful not to overspend) and move the money out of your mortgage and onto the credit card only when your monthly bill is due. This will allow any money sitting in your offset account to reduce the amount of interest paid at the end of the month. If you are financially disciplined, this is a great way to reduce the mortgage monster.
9. Be disciplined
Think before you spend. Do you really need that new handbag or computer equipment? Instead, put the money towards your home loan repayments and effectively, the amount you have to repay your lender. If your home loan has a redraw facility attached, don’t redraw unless it’s absolutely vital. If you find yourself doing this too much, then maybe you should consider another loan type.
10. Get insured
Worried about the current economic climate and your job security? Then it might be a good idea to take out income protection and life insurance policies. This will cover you (and your family) should you lose your job or be unable to work due to illness or injury. If you operate your own business, make sure you have the right insurance in place to cover any loss of income due to fire, theft, damage, etc.
At the end of the day, the key to keeping out of mortgage trouble is not to ignore the problem but to tackle it head on as early as possible and to prepare as much as you can when you are in a good financial position.