Buying a home is an exciting event that many Australians look forward to achieving. In addition to being a solid investment, owning your home can be an overwhelming financial strain.
It is easy to become caught up in the home buying process and not put enough critical thought into how you will make payments. This is especially true for those experiencing unexpected financial setbacks due to illness, job loss, divorce, or family status changes.
If you are struggling to pay for your home and your other daily expenses, do not lose heart or give up. There are various ways to lower your payments and save on your mortgage interest.
1. Switch to Fortnightly Payments
If your current mortgage requires a single monthly payment, you will do well to consider changing your payment frequency. Choosing to make fortnightly payments can save you more than you might imagine.
Here is how you save money using this method.
A fortnightly payment requires you to make half of your monthly payment two times a month. This does not seem significant until you consider the fact that there are 26 fortnights in a year. That means you will make an extra month’s payment every year. You also have the bonus of not adding any strain to your budget. It is a substantial amount of money saved over the life of your loan.
A similar option that will allow you to save even more is to make weekly mortgage payments in one-quarter of the amount of your monthly mortgage.
2. Eliminate Your Lenders Mortgage Insurance
If you did not have a down payment of 20 per cent or more, then you likely have Lenders Mortgage Insurance (LMI) as a part of your loan. LMI is insurance in place to protect your lender should you default on your home loan.
You should note that you must request that the LMI be taken off of your mortgage. It is not an automatic occurrence. Fortunately, if you have a conventional loan, you can remove LMI from your loan and save yourself thousands by accumulating 20 per cent equity in your home.
3. Use Unexpected Income to Pay on Your Mortgage
While most people do not receive a surprise windfall regularly, it is vital to make the most of the funds when they come your way. Instead of spending all of the cash, use a significant portion to pay your mortgage. Even though this idea is nowhere near as compelling as a new wardrobe or a vacation, you will be closer to paying off your home loan in the long run.
Examples of unexpected funds include,
- Tax refunds
- Share investments
4. Link an Offset Account to Your Mortgage
An offset account is a savings account linked to your home loan. The more money you have in the offset account, the less you owe on your mortgage.
*For example* If you owe $500,000 on your home and have an offset account with $50,000, you now owe $450,000 on your mortgage.
The offset account is an excellent incentive to save money, and at the same time you lower mortgage and interest payments. Due to being separate from your home loan, your offset account has no limits regarding how much you can withdraw. So, if an unforeseen event occurs, you still have access to your savings. However, when you change the amount in the offset, the amount you save on your mortgage will also change.
A word of caution. Read the fine print before finalising an offset account as most institutions charge a fee for this service. If you have a relatively small amount of money to put in the account, you may find it is not worth paying a fee for the service.
The option of refinancing is potentially an attractive money-saving option for many homeowners. Getting a lower interest rate can significantly reduce the final price of your home and the required monthly payment. If you can, continue to pay the same amount that you paid before you refinanced.
When you are considering a new loan, a good place to start is by deciding the features in your present mortgage that you would like to keep. Then compare the interest rates on similar loans and contact your current lender and ask them to match the rates you found. Often, a lender will cooperate to retain your business. However, if they do not opt to work with you, you still have the other loan choices you discovered during your research. If you do not have a good credit rating, refinancing may not be available.
Before you make any changes to your loan, make sure that you understand all of the ins and outs of your new mortgage. Check for fees and any hidden costs that can make changing more expensive than you anticipated.
6. Automatically Add Payments
Discipline with money is a struggle for many of us. That is why even though you resolve to put an extra sum of money towards your mortgage every month, it may not happen.
A simple way to keep this promise to yourself is by setting up automatic payments. Calculate the amount you can afford and have it go towards your mortgage.
You can re-evaluate the amount as needed and adjust it to work within your budget.
Revamping your budget is the first step when you are planning to add automatic payments to your mortgage. You have likely heard numerous tips that can help you save money each month.
However, they bear repeating:
- Plan and prep meals for the week so you do not need takeout or delivery
- Focus on quality purchases and avoid fads
- Brew your coffee at home
- Cancel unnecessary or unwanted subscriptions
- Purchase non-perishables in bulk when they are on sale
There are likely other ways you can find to cut corners. Remember that these changes are choices to help you meet a goal. If you view it as a punishment, it will be more difficult to maintain.
7. Consider a Redraw Facility
Redraw facilities allow homeowners to make extra repayments on their mortgages and withdraw the money if they need it.
Frequently, lenders will offer to redraw facilities to borrowers at no charge. Although these can be useful, there are a few important facts about redraw facilities you should understand before you sign on the dotted line.
- You can only access the extra loan repayments you have made to the redraw facility. Your regular mortgage repayment is not a part of the amount available for withdrawal.
- Using a redraw facility can potentially save you thousands of dollars over the life of the loan and reduce the length of time you must pay.
- The money deposited into a redraw belongs to the lender. They can make stipulations regarding fees, the number of withdrawals, minimum and maximum withdrawal amounts, and other details as they see fit.
- Your extra loan repayments are in your hands. You do not have to add extra repayments every month, and you decide the amount of money you repay.
- Your redraw facility balance does not accumulate interest and is not taxable
- When you have paid your loan in full, your redraw facility is gone. This point confuses many borrowers. The money is no longer available because it is paid into your home loan.
These seven tips can help you get control of your mortgage payments and save money.
However, you should be aware of these three things that you may wish to avoid depending on your circumstances.
1. Interest Only Loans
When you have a conventional loan, your mortgage payments go towards your principal (the amount you borrowed) and the interest charged by your lender. Over the life of the loan, you will pay off the amount you borrowed as well as the interest incurred.
If you opt for an interest-only loan, your monthly mortgage payments will only go towards the interest on your loan. No amount of your payment will lower the principal. The interest-only loans usually have a predetermined duration, typically five years. So, after five years of making interest payments, you will still owe all of what you borrowed as well as any remaining interest.
2. Fear of Non-Bank Lenders
If you reject any potential refinance options on the basis that the lender is not one of the big banks, you might be doing yourself a disservice. Please keep an open mind and base your decisions on the facts that present themselves and not preconceived advice from your auntie’s hairdresser.
3. Lengthening Your Loan
You may have heard that adding years to the length of your loan is a good way to improve your cash flow. While this will put more money in your pocket in the short term, over time, you will be adding to the amount you pay for your home by adding years of interest.