Top 10 Tips To Making Your Home Loan More Manageable
It can be tricky to manage your finances, but when it comes to home loans there are some simple things you can do that could save you large amounts of dollars in the long term. Here we look at the top 10 tips to managing your home loan repayments.
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1. Pay a lump sum amount toward your home loanIt may seem obvious but this simple measure can mean saving thousands off your home loan. Many people have lump sums in the bank earning very little interest, by placing these funds into your home loan or even your loan offset account you could save thousands of dollars through not paying on high interest rates.
2. Pay less interest by consolidating your debtsThese days living without a credit card can be very tricky. Many people have multiple credit cards & personal loans. A great tip is to consider rolling all of your loans into your home loan. This process is referred to as debt consolidation. Debt consolidation means you pay your home loan rate not a personal loan or credit card rate which is often 10-12% higher than a home loan rate.
3. Fix part or all of your home loan – Increase certainty of your repaymentsDo you lose sleep every time the reserve bank meets to talk about interest rates? Gain some protection from rising interest rates by fixing part or all of your home loan. You can do this by refinancing your existing loan or choosing a fixed loan when taking out a new loan. Keep in mind you will generally pay a higher interest rate to have piece of mind with fixed loan payments. You may not be able to make additional repayments on a fixed loan either, so if there is a chance you would have additional funds to pay into your home loan, then you should consider leaving a portion of your loan variable.
4. Is your current home loan the most suitable for your situationAre you using all of the features of your current home loan? Do you have a redraw, credit card facility, offset account attached to your loan which you don’t use. Did you know you are probably paying for these facilities? There may be other loan products available which offer a basic features with a lower interest rate.
If you currently have a loan that offers features that you are not using (e.g. offset, redraw), consider changing to a basic product without or less ‘bells and whistles’ that may offer a cheaper interest rate. For example, on a loan of $250,000 over 30 years, the change from 7.57 percent (standard variable) to 6.85 percent (basic variable) is a saving of approximately $122 per month.
5. Refinancing extra repayments out of the property loan to reduce loan amount
Have you been making extra home loan repayments to reduce your loan amount? This is fine if you have an offset account as the balance of the offset account reduces the total loan amount payable. If you do not have an offset account then it may be beneficial to refinance your home loan to reduce the total amount owing on your home loan. This strategy can save you quite a sum of money each month.
6. Save more funds, having a larger deposit to buy the property can save you thousands!
Consider saving a larger deposit prior to taking out a new home loan. This can save you 10 times over in the longer term. By saving more than the minimum required deposit for the property you may not be liable to mortgage insurance and your loan amount is going to be less, which results in you paying less interest over the term of the loan.
7. Honeymoon loan rates – Are they a false sense of security?
Taking out a loan with a honeymoon rate can provide some home loan borrowers into a false sense of security. The honeymoon rate is generally an introductory rate designed as a way to entice borrowers into taking out a loan as they will be provided with a lower interest rate for the first year of the loan.
To ensure you can cover loan repayments, it is a good idea to pay the standard loan rates from the time you take out the loan, this will give you an indication if you can cover the repayments comfortably whilst you still have a buffer in place to make additional arrangements should you not be able to meet your repayments when the honeymoon rate expires. It is also a good idea to check the comparison rate tables for any additional fees that may be required to be paid to compare loan offers between lenders on a level playing field.
8. Consider contingencies – find out about withdrawal, payment variations and options in case of hardship
Should you strike trouble making repayments for whatever reason you should talk with your lender in regards to the options available for a loan withdrawal or payment reduction in case of hardship. Although not normally considered when taking out the loan, a large percentage of borrowers strike hardship and need to make alternative arrangements to cover their loan repayments. If your lender is flexible then they may be able to assist with providing a repayment holiday should you require funds for an emergency.
9. Take a longer loan repayment period to reduce your loan repayments
By taking a longer loan repayment period (referred to as the loan term) you will be required to make repayments for a longer term but the dollar amount of those regular repayments will be less. This can be an easy way to save money in the short term. Consider combing a long term loan with an offset account to make enable you to have the benefit of a lower loan amount meaning you pay less interest. Overall, this can have the effect of reducing your loan term.
10. What to do if interest rate rise – always build in a buffer
Are you going to be borrowing the maximum loan amount available to you? Consider saving for longer to build up larger deposit. This ensure that you will have a buffer to cover repayments should interest rates rise.
At the end of the day you need to ensure you have enough funds to cover the home loan repayments in a variety of different circumstances otherwise there is a good chance you could lose all that you have worked for.