This week we thought we start talking about some simple, yet very effective strategies that you can use to make your mortgage work for you. Call ‘em tricks, tips, hacks – it doesn’t matter. What does matter is that they work, are easy to adopt and help you to manage you finances for the better.
Let’s start with a really obvious, but often overlooked one – paying more than the minimum required repayment.
We all know that a loan is typically written and repaid over a 30 year term. We have said it before and we will no doubt say it again – A LOT can happen in 30 years. Suffice to say that most clients don’t ever actually intend to have their mortgage for 30 years when they are initially asked, but in reality many clients end up having them much much longer.
Let’s look at a classic scenario. A young couple buy their first home. They know what their capacity is, but they want to pay it off in no more than 15 years .
So they are going to shop in a lower price bracket and buy a home that maybe isn’t perfect, but can enable them to pay it off in their desired term. Smart.
They have a child, and now they want a swimming pool so they refinance and add some funds for the pool. At the same time, they extend their loan term back out to 30 years so that they aren’t stretched on one income while she is on maternity leave. Then the kitchen needs replacing. Here we go again, pulling out some more equity to renovate. Then child number two is on the way….. you get the picture. Before they know it, 40 years down the track and they are staring retirement in the face and wondering what happened.
So how do we bridge the gap between the ideal and the reality? By having the right structure and strategy from day one, we can manage things much better.
Paying more than your required minimum repayment each week/fortnight/month does a few things. Firstly, it reduces the interest you pay the bank, significantly. Secondly, it builds you a lovely buffer in your loan, that if set up the right way, can be drawn back on in the event that you need to drop back to minimum repayments, or renovate the home, or replace a car etc. Thirdly, your credit history is going to look amazing for future lending opportunities.
By having a thorough, open and honest conversation not only before you select a loan, but every 12 months, we can work with you to find the most beneficial set up, and make sure it is still relevant throughout the life of your loan. We like to run scenarios of the ‘what ifs’ so that we can help our clients prepare for those twists and turns when they happen.
Of course, there’s no perfect situation, and every single client is different – but having a plan, is better than not having any plan.