Whether you’re a first-time home buyer, upgrading, downgrading or investing, your mortgage is almost guaranteed to be the biggest outlay of your personal budget. The decisions you make here affect all aspects of your savings capabilities. Here’s some of the questions you’ll need to consider:
The shorter the term, the higher the monthly repayments but the lower interest you’ll pay overall. Fifteen-year loans tend to suit those with higher incomes or older borrowers. With a 30-year loan you’ll have easier repayments, but the overall cost of the loan will be much higher and you’ll build equity in your home more slowly.
Fixed rate or variable?
Without a crystal ball on the economy or a way to mind-read the Reserve Bank, it’s hard to pick which way rates will go. But with rates recently at historic lows, it could be wise to fix for a term. Or you can hedge your bets and fix a portion of your loan and leave the rest on a variable rate.
Interest only or extra principal
Paying off the principal can be a great discipline for those that struggle to save money. On the flip side, if finances are tight, you’ll have more in your pocket each month by paying interest only.
Amazingly, making repayments more quickly can dramatically cut the overall length of your loan. Switching from monthly to fortnightly repayments can shave years off – essentially because you’re squeezing an extra month of payments in. There are 12 months in a year, but 13 lots of four weeks.
Even more surprisingly, weekly payments will save you even more money – despite paying the same every year as fortnightly payments. This is because interest accrues daily, so by paying a ‘week early’, that’s a week less interest accrued on the amount you’ve just paid.
An offset account can cut thousands of dollars and years from your mortgage. Basically it means that any money you have in a linked savings account is offset against your loan balance, saving you interest. Offset accounts are most effective for those with a significant amount of savings, but most borrowers will see a benefit.
One thing to remember is that life circumstances change. Look for a loan that offers flexibility, such as drawing down extra funds if you need, or taking a repayment holiday. Most importantly, don’t over extend yourself at the start: borrow what you can comfortably afford otherwise your property investment could become a struggle to maintain if rates go back up