Most borrowers are eager to repay their home loan as quickly as possible, but is there a right and wrong time to start paying extra off your mortgage?
|With interest rates at an all time low, you may find that repayments are a little easier to manage and you may even have extra cash at the end of the month. Listed below are a few questions you should ask yourself before you decide to put extra towards your home loan.
What is your current savings account interest rate?
Although the record low interest rate is good news for mortgage holders, those with high interest savings account could see a reduction in how much interest they earn. The lower interest rates may mean that you are not seeing as big of a return from your savings account.
Take the time and research how these lower interest rates will affect your savings. You may want to consider putting your savings in a home loan offset account. Instead of earning interest at deposit account rates, you will be saving interest on your home loan at your current home loan interest rate.
Do you ever plan to rent your property out?
If there is a chance that you could turn your owner occupied home into an investment property, most experts will recommend that you put any extra payments into the offset account. If you pay it directly into the loan then it will reduce the amount of the loan that you can claim a tax deduction for to the lowest balance. If the funds are put in an offset account, then you still enjoy the savings in interest but the loan balance is not impacted. It may be wise to do it this way to keep your options open down the track.
Does your home loan have fees for extra repayments?
Depending on what type of home loan you have, you may be penalised if you make extra repayments towards your home loan and this could possibly outweigh the benefit of repaying extra. Most fixed rate home loans do not have an extra repayment feature. So, before you contribute extra towards your mortgage, double check that you will not be charged.
What other debt do you have?
This is an important question to ask before you put extra money towards your home loan. Do you have credit cards or other loans that still have money owing? If so, you should prioritise repaying as much debt as possible.
Make a list of every credit card and loan you have and list them from the highest interest rate to the lowest. You should try and aim to pay off the debt with the highest interest rate first, which can help save you more money.
Another option to consider is consolidating your debt. This is done by increasing your home loan to payout all your debts and get some much needed breathing space. You can then focus on one repayment instead of many repayment deadlines. Be wary though, if you consolidate your debts, keep focused on paying the extra that you borrowed quickly. If you just pay the minimum on the new loan amount, you could be spreading this debt over the term of the home loan, thus you may end up paying more in interest in the long term.
Do you have an emergency fund?
If you don’t, this should be considered a top priority. Having savings that are readily available to use for emergencies can reduce the stress associated with losing your job, car breakdowns or medical bills. These funds can be put in a savings account or you could increase the return you get on it by depositing it into your mortgage offset account and be saving interest on your home loan at home loan interest rates. Where ever you locate it needs to be readily accessible.
Even if you only put away an extra $10-$20 a week, you could have a sufficient emergency fund saved in less than a year. Savings calculators online can help work out how much you need to put away to save a certain amount. Check out the savings calculators on our website.
At State Custodians, we have a range of tools to help you pay off your home loan sooner. If you are looking to refinance to a home loan with more money saving features or wish to consolidate your debt into your home loan, we may be able to help you. Give our expert Lending Specialist team a call on 13 72 62 or leave your details here and they will get in contact with you.