A home loan is a very big commitment, so it’s wise to make sure you know the reality of what you’re getting into. Check you’re entering into it with your eyes wide open.
Buying a home is one of the most significant purchases most people make – and home loan repayments are among the biggest costs. You need to ensure your home loan repayments are manageable in practice, not just in theory – and you still have savings set aside for some of life’s little luxuries. Carolyn Bray, Head of Credit at Macquarie’s Banking and Financial Services Group, shares some tips to ensure you achieve the perfect home loan–life balance.
1. Understand your cash flow and budget before taking on a home loan
“One of the fundamentals, even before you think about taking on a home loan, is understanding your cash flow and budget,” says Bray. “Before you think about purchasing, you need to know what you’re earning and what your cash flow is on a monthly basis. It will help you understand the type of property you can afford.”
Also, before you leap into buying property, remember the purchase price isn't the only cost. Stamp duty, legal charges, inspection reports and removalist fees can add up quickly. Those extras can be included in your mortgage amount, but be sure to factor them into what you can afford. It's also wise to build in a buffer, so you're not under stress if interest rates rise.
2. Be realistic about future expenses, too
Expenses don’t end with the purchase of a house. You can never know what the future will hold – so don’t just plan for the ‘best-case’ scenario. In addition to the extra bills you’ll pay when owning a home, compared to renting, you need to factor in maintenance costs, too.
“Also it’s smart to have something in place for the unexpected - whether it's illness or injury,” says Bray. “You have to be realistic about that.”
Future expenses can come in many shapes and sizes – you may like to have a new car every three years or take big holidays. You may want to start a family.
Whatever it is, make sure you factor it in as much as you can when deciding how much debt you’re willing to take on.
3. Pay more than your minimum payments, if you can
The size of your mortgage can be daunting, but it’s important to keep it in perspective. If you’ve followed steps 1 and 2, and been realistic about what you can afford to borrow, those fortnightly or monthly repayments shouldn’t be scary.
But because that mortgage debt doesn’t come with any tax benefits, paying it off should be a priority. Adding just a little bit extra to your repayments whenever you can (for example, after a pay rise, bonus or tax return) can make a big difference to the length of your mortgage term.
4. Use your offset account wisely
Take advantage of the features your mortgage offers. Using an offset account, for example, could save you hundreds of dollars a year in interest.
“The money in your offset account works to reduce the loan balance you pay interest on,” says Bray.
Cash held in an offset account effectively acts as if you'd paid the amount directly off your mortgage. Because interest is charged daily, every dollar offsetting the loan balance is a saving.
Holding $5,000 in an offset account could save $250 a year on a loan that charges 5% interest. That may not sound like much, but it’s certainly money better spent on a nice restaurant than on interest payments!
5. Understand your home loan interest rate
You’ve budgeted correctly, understand your cash flow, are paying off the home loan and offsetting what you can… but you can still do more.
Your home loan rate was set when you took out the loan, and you may be able to reduce it.
“Look at your home loan rate, and check it against the market,” says Bray. “Is it competitive with what’s on offer now? Most borrowers take a set and forget approach to their home loan, but if you got a loan 10 years ago, you’d be surprised at how much rates have changed. Speak with your bank or your mortgage broker, and make sure you’re not missing out on a better deal.”
- The key to achieving a comfortable home loan-life balance is to not over extend your budget when deciding how much you’d like to borrow.
- Know your cash flow and budget, and be realistic about other expenses that might arise over the coming years.
- Remember to consider the additional upfront and ongoing costs of home ownership – from stamp duty to maintenance.
- Make additional payments when you can.
- Use your offset account wisely – keep your savings there and you won’t pay interest on the equivalent mortgage value.
- Keep a track of interest rates, and speak with your bank or broker regularly to ensure your rate is competitive and your loan features suit your needs and circumstances.