Bank­ing:

Effie Za­hos

Money Magazine Australia - - CONTENTS - Effie Za­hos Fi­nance ex­pert and au­thor of The Great $20 Ad­ven­ture, Money’s editor Effie Za­hos ap­pears reg­u­larly on TV and ra­dio. She started her ca­reer in bank­ing.

What if the in­ter­est rate on your home loan in­creased by 2% overnight? Would you be able to han­dle your re­pay­ments? To put it in dol­lar terms, if you owed $500,000 over 25 years at, say, 4%, your monthly re­pay­ments would be $2639. A 2% hike would mean an ex­tra $583 a month. If this sounds painful to you, you’re not alone. As many as one in five house­holds strug­gle to pay their mort­gages and Grat­tan In­sti­tute re­search re­veals more house­holds could face fi­nan­cial stress if rates were to rise by just 2%.

Bren­dan Coates, a Grat­tan In­sti­tute fel­low, says: “Our re­search sug­gests that if in­ter­est rates rose by just 2%, the mort­gage bur­den on the av­er­age house would be higher than it has been in the last two decades.”

If you’re stress­ing over your mort­gage, which tech­ni­cally means you’re spend­ing more than 30% of your house­hold in­come on re­pay­ments, here are five things you could do to ease the pain.

1

Don’t pay more in­ter­est than you have to. Right now you can pick up a vari­able rate home loan for as lit­tle as 3.49% but be­fore you jump lenders it pays to do a breakeven anal­y­sis. Add up all the costs of mov­ing (your new lender may re­quest a val­u­a­tion fee and may also charge an estab­lish­ment fee) and di­vide this by your monthly sav­ings. If, for ex­am­ple, it costs $1000 to move but you’d save $50 a month in re­pay­ments, your break cost is 20 months, mean­ing it will take you just un­der two years to re­coup the cost of mov­ing. Can you be cer­tain that your new lender will be just as com­pet­i­tive in two years? It’s best to al­ways ne­go­ti­ate with your ex­ist­ing lender first. The loans in the ta­ble all have a re­draw and off­set fa­cil­ity but don’t come at a pre­mium. More than likely you’d prob­a­bly have a pack­aged loan if you’re with a ma­jor bank, which means a dis­count of around 0.8%. Even so, the dif­fer­ence in re­pay­ments on a $500,000 loan when com­par­ing the av­er­age dis­counted stan­dard rate from the big four with the cheap­est in the mar­ket is $259 a month.

2

Make the most of your in­come. Put your pay di­rectly into your off­set ac­count. This way you’re re­duc­ing the in­ter­est on your home loan from the mo­ment you get paid. If you live off your credit card dur­ing the in­ter­est-free pe­riod then you max­imise your in­ter­est sav­ings.

The idea is that on pay­day your en­tire salary goes into your off­set or re­draw fa­cil­ity. You use your in­ter­est-free credit card for your liv­ing ex­penses. Dur­ing this time and when your credit card bill comes, the salary in your off­set or re­draw ac­count is cut­ting your home loan in­ter­est bill. This strat­egy only works if you don’t spend more than your bud­get al­lows and you re­pay your card be­fore the in­ter­est-free days end.

3

Rent out your home. Some­times all you need to get back on your feet is six months or so with no mort­gage re­pay­ments. If you can move back home or rent a much cheaper place then this strat­egy can work a treat. You may also be able to take ad­van­tage of the six-year rule, which al­lows you to rent out your main res­i­dence for up to six years with­out in­cur­ring cap­i­tal gains tax. Best to talk to an ac­coun­tant first.

4

Claim fi­nan­cial hard­ship. If you en­tered into a credit con­tract on or af­ter March 1, 2013 you can ap­ply for a hard­ship vari­a­tion what­ever the value of your loan. The first thing is to tell your bank you can’t af­ford your re­pay­ments. This is known as pro­vid­ing a “hard­ship no­tice”. Your bank then has re­spon­si­bil­i­ties to act within cer­tain time frames. Your bank will ei­ther post­pone or de­fer pay­ments, cap­i­talise your in­ter­est, re­struc­ture your loans, freeze your loan or of­fer a tem­po­rary over­draft. See doin­git­tough.info for more de­tails on what your bank can do.

5

Pre­pare for any rate rises. You can pro­tect your pay­ments by lock­ing in. Most fixed-rate loans al­low ex­tra re­pay­ments of up to $30,000 over the fixe­drate pe­riod. If you re­ally want to max­imise the amount of ex­tra re­pay­ments you can make with­out be­ing hit by a penalty, then split your fixed loan into two fixed ac­counts. This dou­bles your ex­tra penalty-free re­pay­ments. Be sure to also fo­cus on pay­ing off any high-in­ter­est-rate per­sonal debts.

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