It has been reported that more than 1.4 million Australians are currently experiencing mortgage stress. It is predicted that once JobKeeper ends, up to 100,000 homeowners could be in default of their mortgage repayments.
Typically the property owners most affected by this conundrum are:
- Young families
- First home buyers
- Holiday rentals
As our income declines, the stability of our employment becomes more uncertain and as the national level of unemployment rises, what can we do now to minimise the impact on our most treasured asset, the family home?
- Establish an offset account
If you do not have an offset account we strongly recommend that you establish one.
An offset account is like a normal everyday transaction account but it is linked to your home loan. You don’t earn interest on your offset account, however, the credit balance in your offset account is “offset” against the outstanding debt balance on your mortgage, hence you only pay interest on the net balance of your offset account and your mortgage.
Accordingly, by having funds in your offset account this will have a positive impact on reducing the interest you are charged on your mortgage. The more money in your offset account the lower the amount of interest you are liable to pay on your mortgage.
So, why wouldn’t you just pay down the mortgage? By having funds in the offset account you can access these funds in an emergency. For example, if you lost your job or your working hours were reduced you can withdraw or transfer funds from this offset account to meet everyday living commitments. Alternatively, if you do not have an offset account, but rather you paid amounts directly off your mortgage you may need to contact your bank to get a loan advance. Not only will this take time but you also run the risk of being rejected and/or incur additional bank fees or charges.
- Make your home loan repayments weekly
The secret here is that the interest is calculated on your home loan, based on the outstanding daily balance. Rather than making home loan repayments at the end of every month, if you make them weekly then the average loan balance for the month must be lower. If the average loan balance is lower the interest you are charged will be lower. The lower the interest you are charged the more of your repayment is used to reduce the outstanding principal of the loan, hence paying off the loan sooner.
- Make extra repayments
Most banks have home loan calculators on their website. Making $20 or $40 extra per week can have a massive effect on reducing the years to pay off your home loan.
Some people are very good savers whilst others are not so good. From our experience the savers have the discipline to put extra funds into the offset account and not touch those funds except in an emergency, ie not for discretionary spending. Generally, the spenders among us tend to get more benefit from setting aside a set amount to pay extra off their home loan, they don’t miss it at the time and their loan is paid off sooner.
With interest rates at a historical low, if you are in a fortunate position to have surplus cash, now is the time to top up your loan repayments.
4. Kill the credit card, use a debit card
The interest rates on credit cards are horrendous. I know, if you pay off the credit card in the 30-day interest-free period you do not get charged interest and you earn all those reward points.
Well, in my experience the majority of people do not pay off their credit card within the interest-free period and the points earned on your credit card are less valuable than the horrendous interest charged. And paying sky-high interest rates, spiralling into uncontrollable credit card debt and damaging your credit history is certainly not worth the perks.
- Consider splitting your loan between fixed and variable
As stated previously, interest rates on home loans are at a historical low but times are also very uncertain.
If you’re worried about fluctuating interest rates, you could choose to fix a portion of your home loan for an agreed term of say, one to five years, while keeping the rest of your home loan variable for extra flexibility. One great benefit of a fixed-rate loan is that your repayments won’t change for the entirety of the fixed term, which can help you to budget.
Should you require more information about how to reduce your mortgage, please submit an online enquiry now or call Peter Quinn on +61 2 9580 9166. We also offer a FREE 45-minute consultation should you have other financial planning, taxation or superannuation issues you may wish to discuss.
The information in this document does not take into account your personal objectives, financial situation or needs, and so you should consider its appropriateness having regard to these factors before acting on it. It is important that your personal circumstances are taken into account before making any financial decision and it is recommended that you seek assistance from your financial adviser.