Here at Career Change Happens we believe that women can be successful in all areas of their life and this includes their finances. I have three great tips to help you reduce your Home Loan and feel good about interest rate rises.
1. Go that little bit further
Always pay more than the minimum monthly repayment even if it is only $10-$20 a week this all adds up and reduces your interest you have to pay long term the more you pay the better off you are. This tip is probably the most crucial tip of all when managing your Home Loan, the flow on effect is priceless, it does not only give you peace of mind but helps the hip pocket.
2. Change the way you save
Because by now you have been putting extra weekly payments into your home loan I have another suggestion, look at your Home loan as a savings account yes this sounds weird but stay with me. When you have a regular savings account you earn monthly interest. Often the interest rate is quite low and if you touch the account (withdraw money) you do not earn interest for that month. You are still paying interest on your Home Loan balance. The banks are smart people they know how to make money, according to www.abc.net.au for the 2013/2014 financial year Australia’s BIG 4 banks’ profits were estimated at $29 billion. You can see that they know how to balance the books and make money. If you put that money that you usually put into a Savings account into your Home Loan it will reduce the interest you pay even further and you can have the option to withdraw from your Loan using redraw for that holiday, car, or even renovation when you need it. In the mean time you can save on interest. But keep in mind you need to have a ‘Redraw’ facility available on your loan at the time of contract to be able to do this. Contact your bank for more advice and review your home loan.
3. Use Interest Rates to your advantage
Interest rate rises can be good! You must think I‘m crazy, right?? I will tell you why! If you have been consistently paying more than the minimum and using your loan as a savings account when there is an interest rate rise your minimum repayments can be less. This is because the interest rate increase recalculates the loan on what you owe at the time of the interest rate rise, not the original loan balance. It is always worth reviewing your loan from time to time because banks bring out new products all the time that may give you further savings and your bank may have some further helpful advice.
Say your loan starts out at $250,000 and your interest is 5% (10 year contract)
250,000 (principal) x 5% (interest) = 12,500(interest) + 250,000(principle) = 262,500 520 (weeks over 10 years) = $504.80
Your minimum repayments would be roughly 504.80 a week
If you continue to pay the minimum over one year you will pay $26,249.60 off the original $250,000 loan + $1,250(in interest) balance should be $225,000.40
If you pay an extra $50 a week over a year you will have paid $28,849.60 you have paid an extra $2600 off the principal balance. The new balance should be roughly $222,400.40
Say after one year there is an interest rate rise of a quarter percent 5.25%
$222,400.40 (new principle) x 5.25% (new interest rate) = 11,676.02 + 222,400.40 = 234,076.42 468 (how many weeks left on contract) = 500.16
Your new weekly minimum repayment would now be $500.16
As you can see your weekly repayment drops by $4.64 a week
If you leave your repayments the same with the extra $50 a week the next increase will save you more again. I know I have probably over simplified the math but you can see the benefits of paying more than the minimum. Now you won’t have to worry about interest rate rises and welcome them knowing that your minimum payments will reduce even with an interest rate rise.
So hopefully you will take on board my tips and save yourself money and worry no more about interest rate rises and see them as an opportunity to pay off your loan sooner!!!