If you've made the most of record low rates by making extra payments on your mortgage, you're laughing all the way to the bank. If you haven't, brace yourself for tougher times ahead — especially if you've got a large loan.
On a $1 million loan your monthly repayments may be $5,265 now (at 4.83 per cent) but you'll be paying just over $600 a month more if the rate moves 100 basis points higher. If your mortgage is more like $1.5 million, you'd be up for $8,830 a month compared with $7,897 now — $933 more. Sure, official rate increases are usually in smaller increments but have you done the numbers on how your household would handle steeper repayments?
The accompanying table shows the impact of a number of different rate rises on monthly repayments for mortgages from $500,000 to $1.5 million. Don't wait for rates to rise, though, before you take action.
Make savings work harder
If you've got savings, put them to work reducing the interest on your home loan via a mortgage offset account. Any cash you have in it will be offset against the capital you owe on your loan, says Bessie Hassan of research house finder.
She cites as an example an offset account of $100,000 and a $1 million mortgage. This would effectively mean paying interest on only $900,000 of the home loan, saving you interest of more than $250,000 and cutting your 30-year loan term by just over four years (based on a 4.83 per cent rate).
Pay more often
Even if you're paying off as much as possible on your home loan, there are savings in making fortnightly rather than monthly repayments. Research house Canstar says on a $1 million loan, this would save you $137,250 in interest and cut your loan term by four years and four months. This is based on a 30-year loan at 4.45 per cent (average standard variable rates differ among different comparison sites thanks to variations in their product database).
As a guide to whether you're on the best loan, financial product comparison website RateCity says the cheapest rate for an owner-occupier variable loan is 3.39 per cent and the most expensive is 5.54 per cent. The average rate is 4.34 per cent. If your mortgage is on the high end, it may be time to refinance.
As a guide for fixed loans, RateCity says the cheapest owner-occupier one-year fixed rate is 3.39 per cent and the highest is 5.04 per cent, with the average rate at 4.17 per cent.
"It's important to check over your mortgage every couple of years to make sure you have the right product for your needs," says RateCity's Sally Tindall. "If you've owned your property for more than a few years, the chances are your loan to value ratio has improved, and that alone can be the basis for getting a better rate." Also reassess any features of your home loan that are costing you fees — if they're not saving you money, a no-frills loan may better suit you.
Power it down
If you have any spare capacity to put more into your mortgage, now is the time to do it. Even an extra $400 a month can make a huge difference. On a $1 million home loan, Canstar says this could save you interest of $130,000 and cut your 30-year loan term to 25 years (based on 4.45 per cent).
An extra $1,200 a month would cut your loan time by almost 10 years, saving you just over $292,000 in interest. You can do some serious trimming by paying an extra $2,000 a month — that way you'd pay off your loan in 17 years and save just under $400,000 in interest.
To put this in perspective, if this $1 million mortgage is yours and you're making the minimum monthly repayment of $5,037, on Canstar's calculations you'll be paying back a total of $1.8 million. That's a huge "mark up". It's surely worth trimming back other areas of expenditure to bring this figure down before it gets much harder thanks to higher rates.
This article was originally published by the Australian Financial Review on 7 April 2017. It represents the views of the author only and does not necessarily reflect the views of AMP.
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If you can’t decide between a fixed or variable rate, a split rate home loan could provide the best of both worlds.