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The official interest rate has gone up again, this time by half a per cent. On a $500,000 loan, that’s an extra $1,600 in payments per year, if the banks pass the rate hike on in full.
For some people, this may be putting them into financial stress already – if this is the case, we urge you to speak to your bank and other professionals as soon as possible.
But what if you’re OK for now but concerned about the future?
Here are five ideas to help you manage your debt.
Simply making repayments every two weeks instead of once a month can save you significant money.
It’s all down to a timing trick. There are only 12 months in the year, but 26 fortnights. So, you’ll end up making an extra two repayments for the year without even realising it.
Let’s crunch the numbers.
If you have an $800,000 loan for 30 years at an interest rate of 5 per cent, over the life of the loan you’ll save more than $210,000 in interest.
And you’ll pay off your loan more than five years earlier, which is always great for your future plans.
If you have a variable home loan, an offset account can be a useful tool.
You can still use it as a regular transaction account but, just by having the money sitting there, it reduces how much interest you’re paying on your loan.
Additionally, unlike interest earned on money in a savings account, money sitting in an offset account will not attract taxes.
And you’ll probably get more value out of it offsetting your loan, than with the interest you would earn on a savings account. For example, your home loan interest may be 4 or 5 per cent while a savings account might earn you 1 per cent at best. So even if you had a loan interest rate of 4 per cent and earned the same on your savings, the latter would be subject to tax — so the effective earnings could be just a little more than 2 per cent if you are on the highest marginal tax rate.
Make sure you’re on the best deal with the lowest rate.
The current rates on the market vary widely. The lowest variable rates are offered by online lenders at around 2 per cent (some have very tough conditions, like 40 per cent deposits). To give you an idea, the big four banks are offering variable rates in the 2 per cent range (on an $800,000 loan, over 25 years with a 20 per cent deposit). The lowest fixed rates are in the mid-to-high 2 per cent range for a one-year loan, or mid-to-high 3 per cent range for three-year loans.
Don’t forget to look beyond the headline rate and also check the fees.
It’s really important to check the one-off and ongoing fees (like application fees, monthly fees, annual fees etc) and ask which ones can be waived. Really check the exit fees to future-proof yourself for refinancing at minimal cost in the future. Professional advice can be critical at this stage, so if you can afford it, sit down with a lawyer or financial advisor to ensure you’re getting the best offer.
Deciding in advance to make extra payments on your loan is a great strategy.
It’s almost a pre-commitment strategy – it gets around our ‘present bias’, which is our preference for alternatives in the present rather than the future.
One example of this strategy is if you manage to get a better deal on your interest rate, keep paying the higher amount. Or, if you get a tax return or unexpected bonus, decide to put part or all of it into your mortgage.
Try and make sure you’re making principal and interest repayments. If you only pay off the interest, your actual loan remains the same.
It is also generally a lower interest rate than interest-only loans, so it can be a win-win.
Finally, if you’re already feeling financially stressed, it might be worth contacting your lender’s financial hardship team. You could also ring the National Debt Helpline on 1800 007 007 to get free, independent help with managing your debt.
Disclaimer: This article provides general information only. For advice specific to your financial circumstances, please see a professional.
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