When The Repayments Become Too Much
Along with joy, overspending often becomes a common trait of the festive season. After having spent a small fortune on presents and festivities and coupled with the effect of recent rate rises, many of us are now working hard trying to make ends meet.
According to statistics, the majority of homeowners in Australia have a mortgage, with an average mortgage size across Australia of $300,000. With a current variable rate an average borrower with a $300,000 mortgage would expect to pay approximately $1,905 in Interest Only repayments per month.
Recent rate rises have slowly added extra dollars to repayments and forced many borrowers to put more money towards their loan at the expense of other spending. In this article, we show you some simple ways in which you may be able to reduce your mortgage payments and/or cost of your loan over time.
1) Check if you are happy with the type of your loan - There are two types of loans: fixed rate and variable rate. During the term of a fixed rate loan, the repayments do not change, as the rate is fixed for a period of time (from 1 to 10 years). Variable rate repayments change with the market as they depend on the cash rate of the Reserve bank. In a rate rising environment like the current, borrowers with fixed rates can benefit as their rates end up being lower than the current variable rates in the market. If you have been receiving letters from the bank advising about another repayment increase, you most likely have a variable rate. If you have a variable rate mortgage, you can enquire about current fixed rates and see if switching the mortgage into a fixed rate mortgage would be cheaper.
2) Consider length of your loan – The average life of a mortgage in Australia is 30 years and most repayments are calculated so that you would repay your mortgage in that time. However, there are lenders on the market that use a 35 or 40 year period to calculate mortgage repayments. A longer loan period will lower regular payments. While extending the life of the loan may mean that you pay less money to your bank per month, in the end it means greater interest repayments.
3) Check frequency of your repayments - In some cases, the frequency of repayments has a direct impact on the size of your payments to the bank and will also influence the life of the loan. This is the case if you have chosen accelerated weekly or fortnightly repayments. These payments facilitate earlier repayment of the loan and lower the resulting interest, although they increase regular payment sizes. For example, an accelerated weekly Principle and Interest payment with a standard loan of $300,000 would equal $519 per week compared to non accelerated payment of $419 per week. If you are currently repaying your loan in accelerated repayments and they become too burdensome, you can switch to regular repayments.
4) Review on-going costs of your loan - An important part of minimizing the cost of your mortgage is keeping the bank fees under control. A bank offer may have a competitive interest rate but heavy on-going and establishment fees which in the end may cost you more money than another lender with less impressive rates but lower fees.
If you currently have a mortgage, review your current on-going costs and consider if your fees are of a reasonable size compared to your mortgage value. In Australia, banks are obliged to give customers Comparison Rates – these rates are developed to illustrate the total cost of the loan and should take into account all the fees associated with a particular loan product. If you are unsure of whether your fees are too high, you can ask your bank for a copy of Comparison Rates. If the difference between your nominal standard interest rate and Comparison Rate is too high, it is very likely that you have a loan with higher fees.
5) Manage your transaction fees – together with on-going fees, there are other fees on your mortgage that may hike up the cost of your loan. It is worth investing some time to sit down and look through your mortgage statement to review your transactions. If you have a lot of transactions going through the loan account, consider getting a loan which will not charge you transaction fees after reaching a certain transaction limit in a given period.
6) Use the benefits of offset or all-in-one account – most banks offer these accounts whereby all your salary or earnings get deposited into one account. This results in an immediate effect of reducing your mortgage balance and subsequent interest. You can then use the same account to draw funds to live on or pay for your on-going costs or commitments.
7) Take advantage of repayment pause options – most banks offer the option of a repayment holiday if your specific situation calls for it. That does not mean that the bank waives the repayments for you; rather it means that instead of being paid, your repayments get added (capitalised) to the balance of your loan. In general, banks offer repayment pause options for a period of 1 to 12 months. Remember that as the interest repayments get capitalised, the loan balance rises, which means that the size of your loan repayments will increase after the end of the repayment pause. Repayment pause is suitable for people that take unpaid leave but who have stable employment to return to. For example, if you are taking time off work on maternity leave and know that your income in that time will reduce, a repayment pause will assist you with your cash flow during that time.
8) Use services of a mortgage broker – Most mortgage brokers offer a free service to a customer as they get paid by the banks. However, unlike a bank manager in a particular institution, mortgage brokers are not beholden to any one bank but have access to hundreds of products from various banks. As they deal with borrowers and banks every day, they are informed of the current promotions on the market and will know which products may better suit your needs. Refinancing of your loan, when done correctly in relation to your needs, should result in you saving money on interest and fees and give you much needed flexibility.
About the author:
Dina Lander runs a Sydney based mortgage broking business called Silver Spoon Finance. For more info visit www.silverspoonfinance.com.au or call 1300-556-446. Dina has years of experience in Finance having worked for JPMorgan and Deutsche Bank. Dina is also a Masters in Finance (Honours) graduate from City University Business School in London, Economics Scholarship Student from University of Bonn in Germany, and a graduate of Moscow State University in Russia.
