Welcome to our Get Home Loan Comfy content series where we’ll help you win at adulting by showing you how your once-distant dream of owning a home is completely within reach. Thanks to Bankwest, we've teamed up with Property Journalist and Author, Nicole Haddow, to take you through the home buying journey so you feel comfortable and ready to sign that dotted line. And although COVID-19 may have thrown your home loan journey a little off course for now, we're hoping this series can help you jump into the property market when you're ready.
From choosing which interest rate is right for you to paying off your mortgage faster, here’s how to manage a mortgage and still live your best life.
A Mortgage Is More Than Just A Rate
You have three choices for your mortgage rate—fixed, variable, or ‘split’—and there are pros and cons for each. A fixed interest rate means your rate stays the same consistently no matter if the market rates rise or fall, whereas a variable interest rate changes along with the market shifts, and a ‘split rate’ is a combination of the two. For example, you can have 80 per cent of your home loan at a fixed rate while the remaining 20 per cent is at an interest rate that varies with the market.
When it comes to your home loan rate there’s no right or wrong choice and it depends entirely on your circumstances and lifestyle. If you choose a fixed rate, it’s absolutely predictable so you will have greater confidence that you can meet your repayments regardless of your economic situation. This option can protect you from official interest rate rises but your fixed rate might be higher than a variable interest rate to compensate for that. Another downfall is that it lacks flexibility, “There may also be fees applied if you want to get out of a fixed interest rate,” Haddow explains.
On the other hand, if you choose a variable home loan and the official interest rate goes down, your rate can go down too, which can save you money. But remember, you need to consider the risk of your mortgage repayments potentially rising in the future.
A ‘split rate’ gives you some benefits of both fixed and variable rates. But you won’t save as much as if you had a variable rate if official interest rates fall, but you also won’t be exposed if interest rates rise.
Don’t forget, a mortgage is more than just an interest rate. When it comes to mortgages, shop around and find one that fits with your lifestyle, needs and budget.
The Mortgage Miracle You Need To Know
The humble offset account is a true mortgage miracle and built-in feature of many home loans that your bank will set up alongside your mortgage. It’s like a savings account that can help reduce your mortgage interest rates so you can pay it off quicker. The money that sits in that account ‘offsets’ your loan balance so you pay less interest. The more money you have in your offset account, the better.
“So, if I have $10,000 in my offset account, that’s better than having $100 in the account, because that $10,000 reduces my interest owing on my loan and I’m also able to access that money as I would a regular bank account.
“For me personally, I put my savings into my offset account to offset the interest on my home loan, which is also the account my mortgage repayment is drawn from each month. I could absolutely use it to pay down my mortgage directly, but I like to have that buffer there in case I need it,” she admits.
Whether you choose to pay down your mortgage directly or keep your savings in an offset account so it’s accessible for a rainy day is ultimately up to the homeowner. Weigh up the pros and cons and consider what works for you and your lifestyle.
The Mortgage-Free Dream
Most home loans stretch out for around 30 years, but there’s no reason why you can’t work to be mortgage-free quicker. The way to make it happen? Haddow says the simple answer is to streamline the process, make additional repayments, and if your circumstances allow it, allocate any lump sums you receive to your mortgage.
Streamlining your mortgage is simple, “Repayments will come directly out of your account and can be made daily, weekly, fortnightly or monthly to suit your lifestyle,” Haddow says. "If you can, align your repayments with your salary so it comes straight out of your account and you aren’t tempted to dip into that pool of money for other reasons."
If you want to pay off your mortgage faster, make additional payments where you can. “The more frequent your payments, the lower your interest. You just need to ensure that by the end of the month your repayments at least equal the minimum monthly repayment amount and only make repayments if you can afford it,” she says. Essentially, there’s no point if it means you can’t afford to buy groceries.
If you do experience financial hardship, Haddows says the best thing you can do is contact your bank as soon as possible to let them know. “There are opportunities to work with the bank to manage through a difficult time. If it’s just a one-off or a temporary situation, solutions will likely be available."
Beyond chipping away at your mortgage with additional payments, if you’ve received a lump sum payment—a tax return, work bonus, inheritance or dividend payments—you could also consider diverting these funds to your loan or dropping it into your offset account.
When it comes to your home loan, find one that suits your budget and lifestyle, and your future self will thank you. No matter your home loan goals, Bankwest can help get you there.
Editor's note: This article is proudly sponsored by Bankwest and endorsed by Urban List. Thank you for supporting the sponsors who make Urban List possible. Click here for more information on our editorial policy.
The information contained in this publication is of a general nature and is not intended to be nor should it be considered as professional advice. You should not act on the basis of anything contained in this publication without first obtaining specific professional advice. To the extent permitted by law, Bankwest, a division of Commonwealth Bank of Australia ABN 48 123 123 124 AFSL/Australian credit licence 234945, its related bodies corporate, employees and contractors accepts no liability or responsibility to any persons for any loss which may be incurred or suffered as a result of acting on or refraining from acting as a result of anything contained in this publication.