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With Australia’s official cash rate sitting at a record low for over three years, it’s easy to understand why adding spare cash to your mortgage might not top your priority list. After all, there are probably so many other things competing for your money, from paying for household expenses to saving for a much-needed holiday.
So why in 2019 should you buckle down and build a mortgage buffer? The simple answer is that it’s an invaluable safeguard. With renewed talk of interest rate rises on the horizon, it makes sense to prepare for the inevitable. Even if the Reserve Bank of Australia (RBA) does continue to hold its cash rate, there’s no guarantee your lender won’t lift their rate independently of the RBA, leaving you with higher than expected monthly repayments.
Building a buffer in your home loan provides an essential safety net against factors outside your control.
A rate rise of 0.25% (25 basis points) doesn’t sound like much, but the effect on your mortgage repayments can be quite significant. Based on a loan of $400,000, for example, an increase of 0.25% on a 3.91% interest rate would see monthly repayments increase by $58. Over 30 years, that’s an additional $20,799 extra. Source: YBR Compare Loan Repayments Calculator.
An interest rate rise is but one way you might experience a change in financial situation. The leading causes of mortgage default include relationship breakdowns, job loss and unexpected illness. Although we hope never to encounter these situations, it’s a reality for which it pays to prepare.
Not only does building a buffer in your home loan provide an essential safety net against factors outside your control, but it also reduces the interest and speeds up the time it takes to pay off the mortgage.
Use redraw or offset
Offset accounts and redraw facilities are two home loan features that use extra income or savings to reduce the balance of your loan. In turn, this lowers interest costs, which brings significant savings over the life of the loan.
An offset account is a savings or transactional account linked to your home loan. While you don’t earn interest on money sitting in this account, the balance is offset against your mortgage, helping you to reduce the interest paid and overall term of the loan.
A redraw facility allows you to make extra repayments to the principal, usually in the form of higher ongoing loan repayments. Although you have the option to redraw the additional funds paid into your mortgage, there may be a fee charge or a limit to the number or frequency of redraws allowed – a handy way to ensure this money stays where it is!
Take out mortgage protection insurance
Mortgage protection insurance, also known as home loan insurance, is insurance available to you as a mortgage holder when you sign up for your home loan. It protects you by covering your mortgage repayments if your financial circumstances become challenging and you’re unable to pay. This insurance isn’t to be confused with lenders mortgage insurance which is a premium paid by mortgage holders to financial institutions to protect the lender in the event of foreclosure.
The cost of mortgage protection insurance will vary between insurers and is influenced by factors like the mortgage amount, your age at the commencement of the policy and how many people need to be insured. Determine the right level of cover with the help of your local Yellow Brick Road wealth manager.