The official interest rate rose again, this time by half a percent.
On a $500,000 loan, that’s $1,600 in extra payments per year, if banks pass on the rate hike in full.
If you are already in financial difficulty, here is some information on what to do.
But what if you’re OK for now but worried about the future?
Here are five ideas to help you manage your debt.
1. Make repayments fortnightly instead of monthly
“Just making repayments every two weeks instead of once a month can save you a lot of money,” says financial adviser Kate McCallum.
It’s all about timing. There are only 12 months in the year, but 26 fortnights.
So you’ll end up making two more repayments for the year without even realizing it.
Let’s crush the numbers.
If you have an $800,000 loan over 30 years at a 5% interest rate, over the life of the loan you’ll save more than $210,000 in interest, says Kate McCallum.
And you’ll pay off your loan more than five years earlier.
2. Use a clearing account
If you have a variable home loan, an offset account can be a useful tool.
You can still use it like a regular transaction account, but just having the money there reduces the amount of interest you pay on your loan.
And you’ll likely get more value out of it offsetting your loan than the interest you’d earn on a savings account, says Kate McCallum.
“For example, the interest on your home loan might be 4% or 5%, while a savings account might earn you 1% at best,” she explains.
And unlike interest earned on money in a savings account, money in a clearing account will not attract taxes.
“So even if you had a loan interest rate of 4% and earned the same on your savings, the latter would be subject to tax – so the effective income might be just over 2 % if you’re on the top marginal tax rate,” McCallum says.
3. Renegotiate your rate
Make sure you’re on the best deal with the lowest rate.
Current market rates vary widely.
The lowest variable rates are offered by online lenders at around 2% (some have very tough terms, like 40% deposits).
To give you an idea, the big four banks offer variable rates of around 2% (on an $800,000 loan, over 25 years with a 20% deposit).
The lowest fixed rates are in the mid-to-high range of 2% for a one-year loan, or in the mid-to-high range of 3% for three-year loans.
Remember to look beyond the headline rate and check the fees as well, says Di Johnson, professor of personal finance at Griffith University.
“It’s really important to check out one-time and ongoing fees (like application fees, monthly fees, annual fees, etc.) and ask which ones can be waived,” says Johnson.
“Really check the exit fees to prepare yourself in the future for refinancing at minimal cost in the future.”
4. Commit to additional repayments
Deciding in advance to make additional payments on your loan is a great strategy, says Di Johnson.
She calls it a “pre-engagement strategy.”
“It circumvents our ‘current bias,’ which is our preference for alternatives in the present rather than the future,” she says.
An 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 receive an unexpected tax return or bonus, decide to put some or all of it into your mortgage.
5. Pay principal and interest
Try to ensure that you repay principal and interest.
If you pay interest only, your actual loan remains the same.
“It’s also usually a lower interest rate than interest-only loans, so it can be a win-win,” says Di Johnson.
Finally, if you are already feeling financially stressed, it may be worth reaching out to your lender’s financial hardship team.
You can also call the National Debt Helpline on 1800 007 007 for free, independent help with managing your debt.
Disclaimer: This article provides general information only. For advice specific to your financial situation, please consult a professional.
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