Managing Your Home Loan
Congratulations, your home loan is settled! Now the real work of actually paying it off begins.
The reality is that mortgage process extends beyond settlement. Properly managing your home loan going forward could potentially save you loads of cash and time.
Annual reviews and regular self-assessments are a couple of ways to manage your home loan but there are more strategies that can help.
Manage your mortgage: Slash it fast!
Let’s face it: your home loan is easily the biggest debt you’re going to have. Therefore, you want to pay it down as quickly as you can. Here are proven ways to whittle it down fast without sacrificing your lifestyle:
- Pay extra: On a $490,000 home loan over 30 years, you can save more than $40,000 in interest by paying just an extra $100 every month. You’ll also get an added bonus of paying off your mortgage faster. Try our Extra Repayments Calculator and check it out for yourself. Bear in mind, it’s best to only do this with a variable rate home loan. You’re ability to make extra repayments on a fixed rate home loan will be restricted and, at worst, you’ll break costs by doing so.
- Pay more frequently: If you pay monthly, you’ll be making 12 payments a year. If you pay fortnightly, the number goes up to 26 because there are 52 weeks in a year. So by paying weekly or fortnightly, you’re essentially making extra repayments.
- Switch to P&I repayments: You can pay interest only if you want more cash in your hand but understand that paying Principal and Interest (P&I) is actually more cost-effective. Suppose you have a $540,000 home loan over 30 years at 4.08%. If you pay P&I from the beginning, you’ll be saving more than $35,000 in interest over the life of the loan than if you paid interest only for just 5 years and then switched.
- Use an offset account: You can reduce your mortgage costs by using an offset account. This is an account linked to your home loan. Any money you keep here directly offsets your mortgage. For example, if you have a $400,000 mortgage and have $20,000 balance in your offset account, you’ll only pay interest on $380,000, as opposed to the full mortgage amount. Therefore, you’ll want to keep your balance as high as you can. This way, as your offset balance grows, your interest payments will steadily decrease.
Keep an eye on your home loan
Yes, it’s easy to be complacent once you’ve reached settlement. The harsh reality is, you now have a mortgage you need to pay it off over the next 25-30 years.
Self assessment of your personal situation is a part of managing your home loan but an easier and more effective way is to have a mortgage broker perform an annual review.
Annual reviews are an excellent way of managing your home loan and it can potentially save you thousands of dollars.
Mortgage brokers can check current lender rates and make sure you remain in a competitive interest rate. They can also assess whether your personal situation has or will change in the future and find a solution accordingly.
Extending interest only repayments
If your interest only period is about to end, you may be able to extend it depending on your lender. However, please note that the lender will likely complete another credit assessment.
Make sure you speak with a professional financial advisor before you move ahead with this option. They can also provide financial advice for your ideas and plans in managing your home loan.
If you don’t want to extend the interest only period, switching to P&I repayments will help you pay off the home loan quicker.
Using equity to buy an investment property
After you’ve been paying your mortgage for some time, it’s worth looking at the amount of equity you currently have. This is especially the case if your property is located in an area where prices have grown recently.
If you’ve accumulated enough equity, you may be able to buy an investment property. Using the equity as a deposit, you csn avoid paying Lenders Mortgage Insurance (LMI). Lenders generally charge LMI when you borrow more than 80% of the property value.
Banks prefer lending to borrowers who have equity and so you’re more likely to get approved for an investment loan.
Increasing your loan amount
If you’re in need of extra cash, it may be a better option to increase your loan amount than to take out a separate loan.
A benefit from this is that you’ll be able to leverage your equity and pay a cheaper home loan interest rate than the usually higher personal loan rates.
As long as you can show that you can afford it, most lenders will allow you to increase your loan size. Please note that banks may charge you a variation fee of around $300 to increase your loan size. However, this can vary between lender.
Managing your home loan: Refinancing
A big part of managing your home loan is considering whether or not you need to refinance.
Refinancing your home loan is simply switching from one lender to another. Since you’re applying for a home loan all over again, you’ll need all the same things you needed when you initially got the home loan.
However, don’t refinance unless you’re sure you’ll be better off. Only refinance if it helps you achieve your mortgage goals such as getting a lower interest rate and associated costs and better service.
If you’ve been paying off your mortgage for 2 years or more, your interest rate may not be competitive anymore which is it’s why it’s important to have an review at least once every two years.
Our mortgage brokers specialise in refinancing home loans. They have the credit expertise to properly assess your situation and help you find the right lender for your needs.
Speak with one of our mortgage brokers by calling us on 1300 889 743 and we can discuss your options. You can also complete our free online assessment form and one of us will contact you instead.
Discharge of mortgage
To refinance your home loan, you’ll first need to notify your current lender and fill in a mortgage discharge form.
Please note that lenders can take up to four weeks to process a discharge.
For instructions on requesting a discharge as well as links to different lender discharge forms, you can check out the mortgage discharge forms page.