Emily Stewart* shares some tips to help people manage their mortgage.
The official interest rate has gone up again, this time by half a per cent.
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.
If you’re already in financial stress, here’s some information about what to do.
But what if you’re OK for now but concerned about the future?
Here are five ideas to help you manage your debt.
- 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.
It’s all down to a timing trick.
There are only 12 months in the year, but 26 fortnights.
So, you’ll end up making an extra two repayments for the year without even realising it.
Let’s crunch the numbers.
If you have an $800,000 loan for 30 years at an interest rate of 5 per cent, over the life of the loan you’ll save more than $210,000 in interest, says Kate McCallum.
And you’ll pay off your loan more than five years earlier.
- Use an offset account
If you have a variable home loan, an offset account can be a useful tool.
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 may be 4 or 5 per cent while a savings account might earn you 1 per cent at best,” she says.
And unlike interest earned on money in a savings account, money sitting in an offset account will not attract taxes.
“So even if you had a loan interest rate of 4 per cent and earned the same on your savings, the latter would be subject to tax — so the effective earnings could be just a little more than 2 per cent if you are on the highest marginal tax rate,” says Ms McCallum.
- Renegotiate your rate
Make sure you’re on the best deal with the lowest rate.
The current rates on the market vary widely.
The lowest variable rates are offered by online lenders at around 2 per cent (some have very tough conditions, like 40 per cent deposits).
To give you an idea, the big four banks are offering variable rates in the 2 per cent range (on an $800,000 loan, over 25 years with a 20 per cent deposit).
The lowest fixed rates are in the mid-to-high 2 per cent range for a one-year loan, or mid-to-high 3 per cent range for three-year loans.
Don’t forget to look beyond the headline rate and also check the fees, says personal finance lecturer at Griffith University, Di Johnson.
“It’s really important to check the one-off and ongoing fees (like application fees, monthly fees, annual fees etc) and ask which ones can be waived,” says Ms Johnson.
“Really check the exit fees to future-proof yourself for refinancing at minimal cost in the future.”
- Commit to extra repayments
Deciding in advance to make extra payments on your loan is a great strategy, says Di Johnson.
She calls it a “pre-commitment strategy”.
“It gets around our ‘present bias’, which is our preference for alternatives in the present rather than the future,” she says.
One example of this strategy is if you manage to get a better deal on your interest rate, keep paying the higher amount.
Or, if you get a tax return or unexpected bonus, decide to put part or all of it into your mortgage.
- Pay principal and interest
Try and make sure you’re making principal and interest repayments.
If you only pay off the interest, your actual loan remains the same.
“It is also generally a lower interest rate than interest-only loans, so it can be a win-win,” says Di Johnson.
Finally, if you’re already feeling financially stressed, it might be worth contacting your lender’s financial hardship team.
You could also ring the National Debt Helpline on 1800 007 007 to get free, independent help with managing your debt.
*Emily Stewart has been an ABC reporter since 2008, and has worked in both radio and television in the Melbourne, Perth and Horsham newsrooms.
This article first appeared at abc.net.au.
