1 Apr 2015
Whether you monitor your loan and the interest rates on a weekly basis or can’t remember when you last thought about your mortgage, here are a few tips that can make a big difference.
1. Consider refinancing
Do you have the best loan for your circumstances? Because both your personal situation and the financial products on the market are constantly changing, it’s worth reviewing your options regularly to see if you can get a better deal with a different (or the same) lender.
Over a 25 year period, the difference of 1% p.a. on a home loan can equate to upwards of $50,000 in interest saved.
Please note there are a few pros and cons about this approach and your Financial Adviser can discuss this further with you.
Pros:
Low interest rates
With interest rates at an all-time low, there’s never been a better time to refinance to a lower rate home loan because the savings can be substantial. For example, dropping your interest rate from 6% to 4% on a $250,000 mortgage can save you up to $300 a month.
The chance to shop around
The big banks are going to incredible lengths to sign you up, offering big incentives – would you believe even giving away cash. Refinancing gives you the opportunity to take a look around, take advantage of the competitive market, and save.
Improved loan periods
Rates are so low at the moment that you could potentially decrease your monthly repayments and shorten the term of your loan. It might sound too good to be true but it’s a reality for many homeowners that needs to be explored.
Cons:
Fees
Refinancing can be a great idea but it does come at a considerable cost. You’ll need to pay an exit fee from your old mortgage and an application fee on the new one, along with any ongoing fees with your new lender. Make sure you crunch the numbers before you proceed.
Inconvenience
The process of refinancing your mortgage is not an easy one, in fact, you might have to be prepared for a couple of months of pain. Your lender will undertake a thorough review of your financial situation, which can be time consuming and tedious.
Less mobility
If you refinance, you’re not going to be able to move house for a while without losing money on the deal. You’ll lose flexibility in the short term because you need to stay put for long enough so that the savings on interest make up for the money lost on fees.
Mortgages are complicated debt instruments. Sometimes refinancing at a lower rate can make financial sense, but there are no easy answers. To ensure your home loan is comparable in today’s competitive market, it’s a good idea to review your financial situation regularly. The most important thing to consider is whether or not this will benefit you in the long term. If not, refinancing may not be for you.
2. Switch to fortnightly payments
Home loan interest is charged daily, so making repayments as soon as possible will reduce your loan amount and your interest repayments, even if your total repayments over a given period of time remain the same.
Changing your repayment schedule from monthly to fortnightly to reduce the daily interest charged against your outstanding balance can add up to thousands of dollars in saved interest over a long period of time.
3. Set up an offset account
Mortgage offset accounts are a great way to cut your interest, especially while you are also saving for a large purchase such as a new car or a major holiday. Offset accounts work like a standard transaction account, but the money in the account is used to ‘offset’ your home loan, with interest being charged only on the remainder of the loan.
For example, if you have an outstanding loan balance of $300,000 and $10,000 in your offset account, interest is charged only on the first $290,000 of the loan.
4. Live within your means
It should hardly need to be said, but budgeting carefully and cutting down on unnecessary expenses can help in a big way. For example, pay off high-interest credit card debts as soon as possible.
Next steps
If you would like to discuss your personal circumstances further and undertake a ‘Mortgage Health Check’, please contact your PSK Financial adviser.
At PSK, we work closely with mortgage professionals to better serve the needs of our clients. With many lenders eager to retain your business, we are finding they are very receptive to fine-tuning your current rate to match that of competitors. When they are not, we are often able to source better rates and importantly, work with you to put into play a goals based plan to repay debt in line with your individual goals and aspirations.
To complete the ‘Mortgage Health Check’, simply email of fax (02 9324 8899) a mortgage statement for any accounts that you have, and we will be in touch with you to discuss the next steps.
