Self-help tips for those paying off a variable rate mortgage:
1. Debt consolidation
Think about rolling all personal loans and other debts into your mortgage. This means you will be repaying them at a lower interest rate, though over a longer term. Just make sure you are sensible with your credit cards and loans after consolidating!
2. Fix some or all of your loan rate
Fixing the interest rate on some or all of your loan will give you surety over repayment amount for the length of the fixed term. This can be a good option for those managing a strict budget but ensure you calculate the costs associated with doing this plus the higher interest rate you will probably pay at a fixed rate.
3. Reassess – is it time to refinance?
Your loan may offer features such as redraw that you don’t use. A loan with more flexibility, i.e. more features, is often more ‘expensive’. Consider changing to a basic product with no - or less - extras as it may have a cheaper interest rate. For example, on a loan of $250,000 over 30 years, the change from 9.23% ($2,053.13 per month - standard variable) to 8.64% ($1,947.14 - basic variable) is a saving of approximately $105.99 per month.
4. Make a lump sum payment and watch your loan shrink
Any spare money you can add to your loan, such as a tax return, bonus or inheritance, can often make a significant difference to the overall loan term and/or the repayment amount.
5. Refinance extra out of your loan to reduce it
Made extra repayments? You can refinance so your repayments reflect what you owe currently, not what you originally owed. For example, assume a standard variable loan (9.23%) has 20 years remaining and is scheduled to be at $230,000 (i.e. $2,053.13 per month). However, extra repayments have reduced the balance to $180,000, so refinancing the loan over the same 20-year period at $200,000 ($1829.19 per month) will reduce your minimum repayments by approximately $223.94 per month.
6. Lengthen your loan term
Depending on your property investment and mortgage strategies, you may want to consider increasing your loan term to 30 years (whilst uncommon, there are 40-year loans available). Yes, you will be paying it off over an increased amount of time but your repayment amount will decrease. Say a $250,000 loan at the standard variable rate of 9.23% has a loan term of 25 years ($2,137.57 per month) that is extended to a 30-year term ($2053.13 per month) – the repayments will decrease by $84.44 per month.
7. Most importantly, always factor in future rate rises
Any savvy borrower is already repaying their mortgage at a rate at least 0.25% higher than is required. This ensures a rate rise can be easily managed, and if rates don’t rise – or fall – you are ahead of the game and will see your loan term decrease.