5 Ways You Can Better Manage Your Home Loan Repayments
Interest-only home loans are a type of home loan that are popular with investors to finance their mortgages with low repayments in the short term. However, repayments only cover the interest on the amount you have borrowed. This means that there is no reduction in the principal. This can cause the loan to become expensive in the long run, but there are ways that you can manage paying off your loan before things get out of hand.
The Rise in Fees
Interest-only lending might have its appeal at its initial stage with the promise of lower repayments in the short term and greater tax deductions on an investment property. According to ASIC, this type of loan is most popular among investors with 2 in 3 investors opting for an interest-only loan, followed by 1 in 4 owner-occupiers.
However, The RBA has found that Interest-only lenders will soon feel the pinch of a $7000 increase being added to their loan repayments in the next 3 years once their interest-only period expires.
API has teamed up with Savvy, BRW’s fastest growing company in 2015, to help you properly manage your repayments at the end of the interest-only period with these five essential tips.
1. Open an offset account
Bill Tsouvalas, CEO of Savvy warns that you need to choose a loan with the right features and structure to make it work, “Others may not have the right structure such as offset accounts or redraw facilities to save them money right from the get-go.” You can open a transaction account which will be linked to your home loan. Whatever funds are in your transaction account will be offset against your home loan balance. For example, if you have a loan amount of $200,000 and you have $10,000 placed in your transaction account, you will only end up paying interest on the $190,000. It is a great way of reducing the amount that you pay on the interest of your loan.
2. Make additional payments
This is the not so fun part, but it will be beneficial in the end. You can make additional repayments whenever it is possible to help reduce the amount you owe. This also means that making extra repayments that are in your financial reach. You will be surprised how $20 or $50 added to your repayments can help you reduce your costs.
Alternatively, you can lump up the additional $20 or $50 dollars into a savings account and make lump sum payments once it has reached a sizable sum. However, you should check that your lender does not have any penalty fees on making additional payments along with the amount that you are planning to pay.
3. Keep your options open
If your loan becomes difficult to repay over time, you might want to consider looking for a house that is more affordable. This will help reduce costs significantly and help you meet your repayments instead of pushing you into the red.
You could also look at other financing options such as refinancing your home loan for a lower interest rate. Keep in mind that refinancing can come with refinancing costs such as exit fees, and application fees that can push up the costs on your end. However, it is advisable that you speak to a broker or a consultant who will be able to assist you in finding a financially sound option for you.
4. Re-adjust your budget
If you do not have a budget in place then you need to start one immediately. However, if you already have one it is important to track how you spend your money. According to UBank, 86% of Australians don't know their monthly expenses, and without being able to keep track on these you could lose thousands of dollars which can be used towards paying off things such as your home loan.
5. You can ask for a reduction
The beauty of comparing loans to find one with a low interest rate and better repayment features means that you can negotiate with your current lender for a reduction in interest rate. However, it is important to compare apples with apples. You can use a comparison website to help you get low rates.