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With the post COVID mortgage landscape evolving rapidly here's a quick guide for existing and prospective mortgage holders on saving tips, opportunities and common mistakes to avoid.
Amongst the many ways to minimise expenses and boost savings, there are some tips for existing and prospective mortgage holders. Here are some practical and effective steps you could consider.
For Existing Mortgage Holders
If your home loan is over two years old, given the recent rate cuts announced by the RBA, there is a strong possibility that your home loan isn’t competitively priced. Reach out to a mortgage broker to see if this is the case. Look at refinancing to a more competitive rate if your interest rate is higher than what the market is offering. Here’s how refinancing could help you, depending on your financial circumstances.
- Add funds back to your monthly budget: Even a half per cent dip in your interest rate could save you thousands over the life of your loan. Refinancing to a lower interest rate will reduce repayment amounts - instantly adding back funds to your monthly budget and boosting purchasing power during possible times of financial distress.
- Expedite Homeownership: If you are not facing any financial hardship then by maintaining the same repayment amount on a lower interest rate you could shave a few years of your home loan and close your mortgage faster.
- Put savings back into repayments: In the wake of reduced daily commuting expenses, lesser travel and eating out, a lot of Australians have brought down their living expenses. COVID provides an excellent opportunity to put these savings back into your repayments. A larger repayment on a lower interest could substantially reduce your home loan tenure and expedite homeownership.
For Prospective Property Buyers
If you are financially secure and are looking to buy property, this could be the right time for you to do so. Here are some compelling reasons.
- Low interest rates: The current interest rates are the lowest in our history and with two consecutive RBA rate cut announcements, they are unlikely to dip any further.
- Government incentives: There are multiple government schemes and incentives for first home buyers and existing property owners. Some schemes are time-bound, for example, the First home loan deposit scheme (FHLDS) has 10,000 places till Dec 2020.
- Lesser Competition: Many buyers have postponed or cancelled their purchase altogether due to COVID caused financial hardship. You may, therefore, be facing a lot less competition in scooping your dream home.
- Motivated Sellers: In addition to fewer buyers, a lot of sellers may be looking at a sale for financial respite, putting you in a favourable negotiating position.
- Lender Risk Aversion: If your finances are stable, lenders are likely to favour you over other borrowers who may be self-employed or working in high-risk industries like hospitality, tourism, air travel and retail among others.
Common Mistakes to Avoid
Seeking financial respite from lenders through government incentives without experiencing any financial hardship could adversely impact your future mortgage approval chances. Avoid these common mistakes.
- Accessing your super without facing any financial hardship: If you’ve made withdrawals from your superannuation, then you are perceived as financially insecure by lenders. Not only does this affect your mortgage approval chances, but you also can’t use these withdrawals for a home loan deposit or as genuine savings.
- Deferring repayments in anticipation of financial distress: Putting your repayments on hold will increase the cost of your loan as interest capitalises during this period. You would need to make up for this by increasing repayment amounts, loan tenure or through a combination of both once your mortgage holiday ends.
- Extending a mortgage holiday without considering alternatives:
- If you are in dire financial straits but expect to make a comeback then opt for mortgage holiday or a holiday extension at the earliest before you miss a repayment.
- But there are circumstances where a mortgage holiday or an extension may not always be the best way forward. For example, if you happen to be in a high-risk sector like international travel or tourism with almost no chances of an income correction, then avoid diluting property equity by deferring repayments. In such a scenario, perhaps selling your property may be a better approach. Seek professional advice from your lender to make an informed decision.
- Also, if you are just about managing to make repayments don’t use a mortgage holiday as a tool for financial respite, instead, consider ‘Interest-only repayments’ or refinancing before applying for a mortgage holiday.
- Increasing online spending: In the wake of remote working, coupled with a consequent reduction in daily commuting expenses, lesser travel and eating out, many of us have increased our online spending thanks to this extra saving. Lenders may view a significant increase in online spending during COVID as a long-term habit, which could limit the amount you can borrow.
Navigating the complexities of a post COVID mortgage landscape could be overwhelming. It’s best to seek professional help. Reach out to us for the most suitable option for you as per your circumstances.
The information is a compilation from various sources for your benefit and should not be relied upon in lieu of appropriate professional advice.