Managing Your Mortgage
For most Australians, a mortgage is one of the biggest financial commitments they will ever undertake. It can feel overwhelming at times, but with the right strategies, you can effectively manage your mortgage, reduce stress and even save thousands over the life of your loan. This guide is designed to help you navigate the complexities of managing your mortgage, whether you’re a first-time buyer, an investor or looking to refinance.
Understanding Your Mortgage
A mortgage is essentially a loan used to purchase property. In Australia, home loans typically come with a range of features and options. Here are the key components to understand:
Principal: The amount you borrow.
Interest: The cost of borrowing the money, expressed as a percentage of the principal.
Loan Term: The length of time you have to repay the loan, often 30 years.
Repayment Frequency: Most lenders offer weekly, fortnightly or monthly repayment options.
Fixed vs. Variable Rates: Fixed rates remain constant for a set period, while variable rates can change in line with the market.
Understanding these basics will help you make informed decisions when choosing and managing your mortgage.
Tips for Managing Your Mortgage Effectively
1. Create a Budget and Stick to It
A realistic budget is the foundation of successful mortgage management. Start by tracking your income and expenses to identify how much you can comfortably allocate to your mortgage repayments. Include an emergency fund in your budget to cover unexpected costs, ensuring your mortgage remains a priority.
2. Choose the Right Loan Structure
Selecting the right loan structure can significantly impact your financial situation. For example:
Principal and Interest Loans: These reduce your debt over time by paying down the principal and interest simultaneously.
Interest-Only Loans: These loans reduce repayments in the short term but do not decrease the loan balance.
Discussing your options with a mortgage broker and financial adviser can help you determine the best loan structure for your goals.
3. Consider Refinancing
Refinancing involves replacing your current mortgage with a new one, often with a different lender. Reasons to refinance include:
Accessing a lower interest rate.
Consolidating debt.
Unlocking equity for renovations or investments.
However, refinancing comes with costs such as exit fees and application fees. Assess the potential savings against these costs to determine if refinancing is worthwhile.
4. Make Extra Repayments
If your loan allows, making additional repayments can significantly reduce the interest you pay and shorten your loan term. For instance, a $500,000 loan at 5% over 30 years could save you over $100,000 in interest if you pay an extra $200 monthly.
5. Utilise Offset Accounts/re-draw facility
An offset account is a savings account linked to your mortgage. The balance in this account offsets your loan balance, reducing the interest you pay. For example, if you have a $400,000 loan and $50,000 in your offset account, you only pay interest on $350,000.
6. Pay Fortnightly Instead of Monthly
Switching to fortnightly repayments means you make 26 payments per year instead of 12. This effectively adds an extra month’s repayment annually, helping you pay off your mortgage faster and reduce interest.
7. Avoid Lifestyle Inflation
As your income increases, it’s tempting to upgrade your lifestyle. Instead, consider directing extra income towards your mortgage. This approach will help you achieve financial freedom sooner.
The Role of Interest Rates
Interest rates play a significant role in your mortgage repayments. Even a small change in rates can impact your monthly repayment and overall cost. Here’s how to stay on top of interest rate fluctuations:
Monitor the Market: Keep an eye on changes in the Reserve Bank of Australia’s (RBA) cash rate, as this often influences mortgage rates.
Consider Fixed Rates for Certainty: If you prefer predictable repayments, locking in a fixed rate for a few years may provide peace of mind.
Negotiate with Your Lender: If you notice lower rates advertised elsewhere, contact your lender to negotiate a better deal.
Dealing with Financial Hardship
If you’re struggling to meet your mortgage repayments, act quickly to address the issue:
Contact Your Lender: Most lenders have hardship programs to assist borrowers facing financial challenges. They may offer temporary relief, such as reduced repayments or a repayment holiday.
Revisit Your Budget: Identify non-essential expenses you can cut to free up funds for your mortgage.
Seek Professional Advice: A financial adviser can provide tailored strategies to help you manage your situation.
Planning for the Future
Managing your mortgage is not just about meeting repayments today; it’s also about planning for the future. Consider the following:
Building Equity: As you repay your mortgage, you build equity in your home, which can be a valuable asset for future investments or retirement.
Review Your Mortgage Regularly: Life circumstances change, and your mortgage should adapt accordingly. Regular reviews can help you identify opportunities to save.
Final Thoughts
Managing your mortgage is an ongoing process that requires attention, planning and discipline. By understanding your options, making strategic decisions and seeking professional advice when needed, you can reduce stress, save money and work toward financial independence.
If you’re looking for guidance on managing your mortgage or achieving your broader financial goals, contact Tanner Jordan Wealth today. Our team of experienced advisers is here to provide tailored advice and support every step of the way.
Comment from Tanner.
Utilising debt to purchase appreciated assets, is essential to accumulating wealth. However, it can become stressful when you’re struggling to service that debt. This can be by interest rates going up, a cost-of-living crisis, losing your job or being over-leveraged. Therefore, it’s extremely important to understand and have a dynamic plan in-place to assist you now and ongoing.
It's important to review rates consistently throughout your loan term. This means constantly reviewing your interest rate with your current lender and the market, every couple of years for the whole duration of your loan term (which most likely is 30 years).
Consolidate debt into your home loan. If you have personal loans, student loans (HECS), car loans, etc. restructuring this debt into your home loan could potentially save you on interest. As your home loan most likely has the lowest interest rate.
If you’re in financial hardship, it’s imperative you’re proactive about it. Do not ignore it or hide from it. There are many strategies to combat this to put you in the best position possible.
If you can, shorter home loans can provide you with so much more flexibility and savings. For example, a 20-year loan term instead of a 30-year loan term. You pay less interest and generate greater equity. Therefore, if you’re struggling or looking to accumulate, you have better options and opportunities going forward.