1. Get serious about your budget
When the interest rate pressure is on, half-hearted and poorly-thought-out budgets won’t cut it. We know this, so why do we avoid making budgets – let alone keeping to them? Because it usually means giving up things that we really like. The key is to be realistic and put together a plan that doesn’t compromise your or your family’s lifestyle too much.
The first step should take a couple of hours at most. Work out your monthly income, then your expenses. Regular expenses include such things as transport, groceries, lunches, childcare and so on. Then include your debts, including credit cards, any car loan, any personal loan and, of course, your mortgage payments.
Now make a list of your unnecessary expenses. You know what they are. Which luxuries can you realistically give up? Few of us realise how much money we waste on consumer goods and treats. Think about such things as glossy international magazines, that second cup of coffee, movie visits, yet another pair of shoes, the petrol station chocolate bar, season tickets to the football and a hundred other things that you only use once or are indulgences, pure and simple. If you think you’ve already pared your lifestyle down to the bare bones, take a look at your past year’s credit card statements. Add up all the non-essentials you’ve put on the plastic. You’ll be shocked.
You don't want to give up everything, obviously, but try cutting back. Does your typical working day include the following?
• buying cigarettes ($20)
• a couple of takeaway coffees ($8)
• lunch ($12)
• a couple of beers after work ($10)
Total: $50 a day. That’s $250 a week, $1,000 a month or $12,000 a year! If you had a mortgage of $300,000 at 5.76% over 25 years, by making $1,000 in extra repayments each month, you'd save more than $138,726 in interest and be mortgage-free 12 years and three months sooner.
Even just cutting down a little on your expenses will see you reap huge financial benefits for many years to come, so long as you put the daily savings towards repayments and not a whole new set of indulgences!
2. Conquer credit cards
Credit cards are handy to use and accepted almost everywhere. It’s surprising just how easy it is to get one, but it’s not so surprising to learn that there are a lot of people out there who cannot manage or reasonably afford to use a credit card.
Do you really need one? If so, how many are you using? Do you use them all the time just because you want those 'rewards' or frequent flyer points? To be frank, without credit we wouldn't own half the stuff we do. Mortgage interest rate rises would barely bother many of us if our credit card debt was more manageable.
Cutting down on credit card use isn't easy – it can be such an ingrained habit – but here are some tactics you can try:
• Don’t carry cards with you all the time. Instead, keep one card in the (locked) glove box of your car, or at home, so that it's inconvenient to go and get it.
• Tell your credit card provider/s that you want to reduce your cards’ credit limit/s and ignore all their letters exhorting you to increase them.
• Ask your bank, and other banks, about how they can help you consolidate your credit card and other debts.
• If it's possible, pay off your credit card debts within the interest free period. If this is not possible, pay much more than the minimum asked for.
• You must chip away at the total owed, all the time, to get on top of credit card debt and free up the funds needed to cover higher mortgage payments.
3. Sort out your banking
We all know that most banks charge fees on most of their accounts and you need to hang on to every cent you can. The trick is to find an account with the lowest possible account-keeping fees and transaction costs, which still allows you easy access to your money. Here are a few important things to keep in mind about bank accounts:
• Make sure the interest is calculated daily. Some bank accounts pay interest on the monthly balance, which really means you will get interest calculated on your minimum monthly balance.
• If interest is paid frequently, the better the return on your savings will be. This is because the interest ‘compounds’ or accumulates on itself.
• Many banks have deposit accounts, which pay the full interest rate on every dollar in your account. This is good. Some, however, offer different interest rates on different portions of your account. These so-called ‘stepped’ accounts should be avoided unless you can be sure that you will always have a balance big enough to attract the highest interest.
• Fees and charges for writing cheques and making deposits or withdrawals all add up. Look for an account which is free of charges or which allows a number of free withdrawals each month.
• If you' re likely to make a lot of transactions each month, what you really need is a transaction account with low or nil charges. You can cut down on your transaction fees in three main ways: pay your bills with automatic debiting from your account, as this is usually a free service; use EFTPOS to access cash when shopping as it only counts as one transaction; and avoid using another bank’s ATM for your transactions as the charges are higher.
4. Make mortgage payments top-of-mind
You may already be doing this, but when a lender starts demanding more of your money at each payment, you need to really focus your mind. Playing mind games actually helps some people. For example, act as if your salary is lower than it is. Arrange for your employer to take an agreed amount out of your real salary each week and put it into a new, separate account in your name. After a few weeks, you won’t miss it and the extra funds will be really handy each time a higher mortgage payment falls due.
Another mind trick is to add one, two or even three percentage points to your repayment amounts. For example, if you have $300,000 mortgage at 5%, you can start paying at 7% which means an extra $367 per month.
Obviously, not all borrowers are in a position to do this. In fact, a rate rise of 0.25% can throw some people’s lives into financial chaos. If, however, you can make the sacrifice – and if the terms of your loan allow you to pay more than the minimum at each repayment – then paying more than you actually have to will mean interest rate rises will concern you far less. You will be used to paying a lot more! You’ll also pay off your loan faster and save yourself a packet in the long run.
5. Turn 'expensive' into 'expendable'
Avoid expensive outings with extravagant friends – at least occasionally. Put the money you would have spent towards your mortgage payments. Or give something up, preferably something expensive like a bottle of quality wine that you regularly buy.
6. De-clutter for profit
Your trash is someone else's treasure. Take a look at eBay and other auction sites. It’s astounding what some people put up for sale. Even more astounding, however, is that so much of it actually sells. Someone is crying out for the hideous vase you got last Christmas. You just haven't met them yet.
7. Ain't too proud to beg
Parents, family members and sometimes even really good friends might be prepared to help you meet any extra mortgage obligations. They might ‘make up the difference’ for a few months while you get your finances in order. Or they might be able to give you an interest-free loan or, even better, a one-off cash gift. Surprisingly often, close family members and friends can be unaware of the squeeze others close to them might be feeling. If your relationship can stand it, ask for help.
8. The 'fortnight' principle
If you haven't already heard of this one, it's a must-do. Make your higher loan repayments on a fortnightly rather than monthly basis.
It works like this:
Split your new monthly repayment in two and pay every fortnight. You'll hardly feel the difference in terms of your disposable income, but it could make thousands of dollars and years of difference over the term of your loan. The reason for this is that there are 26 fortnights in a year, but only 12 months. Paying fortnightly means that you will be effectively making 13 monthly payments every year.
As an example, if you have a loan of $300,000 at 7.07% over 25 years, your monthly repayment will be about $2,314. This equates to a total repayment of $640,126 over the term of your loan. By paying fortnightly, you will save $48,534 in interest and 4.5 years off the loan.
9. Reduce the principal
Does it seem to you that all you're doing with your regular mortgage payments is paying off the interest, regardless of what that interest rate is? Unfortunately, you're probably right, as this is one of the by-products of compound interest. Try everything you can to get some of the principal repaid early and you’ll really notice the difference. In fact, if you're taking out a loan for the first time, or a new loan, you can start paying off the principal with your very first payment! With most new loans, the first repayment won't be due until a month after settlement. If you can manage it, pay the first instalment on the settlement date itself. If you do this, you will be one step ahead of the lender from day one. Every little bit counts.
Every dollar you pay off your mortgage above your repayment amount attacks the principal amount, which means down the track you’ll be paying interest – even higher interest – on a smaller principal amount. Handing over the occasional lump sum or making regular additional repayments will help you cut many years off the loan term.
10. Wrap it up
If you are about to take out a loan, ask what financial packages your lender can offer. Common package inclusions are discounted home insurance, fee-free credit cards, a free consultation with a financial adviser or even a fee-free transaction account. These things may seem insignificant compared to what you are going to be paying on your home loan, but you can turn those little savings on other financial services into big savings on that home loan.
11. Stay alert
It's tempting to let your mortgage just roll along, with you making your repayments as they fall due and thinking as little about it as possible. Mistake! You really need to keep up-to-date with what’s happening in the marketplace. You might suddenly find there’s an opportunity to put yourself well ahead of the game. Rates may change, or new products may appear on the market that will allow you to seize an opportunity or negotiate a better deal.
Because merely staying alert about what's out there can potentially save you thousands of dollars, it’s hard to justify being complacent or, worse still, an uninformed victim. Keep buying Your Mortgage magazine as it will help you become familiar with the terms used in the industry, show you who the main players are and indicate the future trends in lending.
12. Be assertive
Being hit with higher interest rates can be demoralising for borrowers. You are, however, still a customer and your business is still important to your lender. Take some time to research the rates and features offered by your lender's competitors and prepare to be a bit pushy. See what extras or incentives your lender might offer you to stay with them. Look like you may walk. If a lender feels you know what you're talking about, your status goes up in their eyes and your chances of getting a better deal also go up. Lenders invest a lot of money in advertising to get you. Make them work to keep you.
13. One loan at a time
When rates are on the way up, it's no time to get stuck with another loan. And yet, if you buy another property before selling the one you're in (quite a common occurrence) you could find yourself with two loans going at the same time. The second loan is known as bridging finance, and is usually only taken out for a very short time. That's the theory. If you've bought a new property with bridging finance, but can’t sell your first property, the squeeze is on. The bridging finance usually costs you an extra couple of percent premium on the standard variable rate, if not more. Consider using a deposit bond or selling before you buy, as it will be much more cost effective for you than taking out another loan.
14. Think small
The onset of the sub-prime crisis have forced out a lot of smaller non-bank lenders from the mortgage market. Some borrowers still worry about what might happen if their small, less mainstream lender gets into financial trouble. Keep in mind that you’ve got their money – don't worry too much. There are some small lenders whose names might not be familiar but whose lower rates might be enough reason for you to get in touch.
15. Time is money – so hurry!
There are all sorts of strategies for paying less interest on your loan, no matter what rate you're being charged, but the mantra always remains the same: pay your loan off as fast as you can. A $300,000 taken out at 7.07% for 25 years will incur monthly repayments of about $2,134, equating to a total repayment of $640,126 over the term of your loan. If, on the other hand, you pay the loan off over 10 years, your repayment will be $3,494 a month (yikes!) but the total amount you will repay over the term of the loan will be only $419,290 – saving you a whopping $220,836! Now, that's the sort of saving that makes rising interest rates pale into insignificance.