It’s likely that your home loan is your single biggest expense, so it’s understandable that not being able to meet your repayments, even for a short period of time, would create financial stress. Here are 4 steps you can take to improve your resilience and stay on top of your mortgage.
1. Build up an emergency buffer
If you found yourself injured, out of work or had an emergency expense, you’d need to be able to maintain your regular commitments and living expenses for a period of time. Here’s a good test – if this happened today, how long could you go before you ran out of money? A good rule of thumb is to give yourself an emergency buffer by getting ahead on all your loans (especially your mortgage) by at least 3 months. You can do this by making extra repayments, or make payments more frequently. By paying fortnightly for example, you actually make the equivalent of 13 months of repayments each year, enabling you to build up an extra month of repayments every 12 months.
2. Avoid putting more on credit
The more credit you have, the more commitments you’ll have to manage if you do find yourself faced with a tight financial period. This is a challenge because driving a nice car, treating yourself to something new and making home improvements can be really satisfying.
It might be nice to drive a new car, but will it really make a difference to your lifestyle if you get one 2 years old instead of brand new when your loan could be $10,000 less? When out shopping, enjoying instant satisfaction is great, but if you’re using store credit or credit cards, it can be an expensive habit to maintain. When things get tight financially and you need money to pay for bills, available credit on a credit card is often just too tempting. In fact, if your credit cards are often maxed out, this could be an early warning sign that you’re headed for financial stress. The goal? Forget about what others think, park your pride if you’re serious about weathering a potential storm and aim to live within your means.
3. Pay attention to your home loan features
If you need to redraw payments in advance, can you? If you’re worried about budgeting or rate rises, could fixing your home loan help? Ensure your home loan can offer the flexibility you think you might need. If you’re paying the minimum on your home loan while trying to add money to a savings account, did you know that the interest earned on an average savings account could be nearly half the interest you’re paying on your home loan? Choosing a home loan with an offset account means that you could have your savings working harder for you, even if it’s only a small amount. When you park your money in an offset account, interest is calculated on your home loan’s outstanding balance, less the balance in your offset account. This saves you interest on your loan, plus you can still access your savings whenever you need it.
4. Don’t give up on insurance
Whether it’s your car, your home or your health, having adequate insurance can really help. When things get tight, people often reduce or reconsider having insurance altogether, as it can feel like an ongoing expense that you don’t always see a benefit for. Your home is your biggest asset, and updating your cover is equally important. Sydney has experienced surging house prices in recent years and the cost of building a home has also increased. When was the last time you updated your insurance? Don’t be caught short by having inadequate insurance cover.