FRAN HUGHES: The 5 hacks to make big inroads into your mortgage

Federal Treasurer Josh Frydenberg has given his backing to regulators to crack down on high-debt home loans in an effort to reduce financial risks amid a surging property market. Rising prices, fuelled by Federal Government stimulus measures and record-low interest rates, are seeing borrowers take out bigger-than-normal home loans. According to the Australian Bureau of Statistics, the average size of a new home loan is now $578,335. On its own that does not seem much. But compared to the average household income of $99,596, it is concerning because it is six times the size of a borrower’s income. One in every five borrowers now has this high debt leverage ratio, leaving them exposed to financial stress on the back of the rising costs of living. Like many Aussies, if you are a proud mortgage payer, here are five smart strategies to take advantage of the current low interest rates and pay down debt sooner. MONITOR AFFORDABILITY Mortgage broker eChoice suggests that as a rule, home loan commitments should represent no more than 28 per cent of household income. Anything above that amount, and the average earner might find their financial situation stretched. In the present environment, the average monthly home loan repayment of $2282 sits on the high side at 36 per cent of average household income, with any increase in interest rates or the rising cost of living putting a homeowner at risk of falling prey to mortgage stress. Monitor your affordability by using the mortgage calculator at moneysmart.gov.au. MAKE EXTRA REPAYMENTS Take advantage of low rates and get ahead on your mortgage by making repayments as if you had a loan with a higher interest rate. A general rule is to factor in an interest rate of 5 per cent. Reserve Bank of Australia governor Philip Lowe says low interest rates will continue until 2024. This gives borrowers three years to make inroads into their mortgage, which will protect household budgets from higher interest rate shocks later. Consider also switching monthly repayments to fortnightly. By paying half the monthly amount every two weeks you’ll make the equivalent of an extra month’s repayments each year. SHOP AROUND Useful websites such as canstar.com.au or finder.com.au provide comparisons against your existing home loan rate. Special rates as low as 1.79 per cent have been advertised. Work out what features of a home loan suit you, and tailor a mix of fixed and variable portions of your mortgage to give you certainty on your repayment commitments over the short to medium term. Before switching loans, consider the exit costs. It may be worthwhile negotiating a competitive interest rate with your bank first. BUILD UP A CASH RESERVE Building up a cash reserve in an offset account could reduce the amount of interest you pay and help pay off your mortgage faster. Whether the cash comes from a windfall, savings or annual bonus, it pays to store it as a buffer for future rate hikes. SEEK ADVICE When in doubt, seek the advice of a mortgage broker or financial planner. The insight and guidance of an expert can go a long way to giving you comfort and assistance in achieving a better financial outcome and putting your mind at rest about the future. Fran Hughes is head of financial solutions at Nexia Perth

FRAN HUGHES: The 5 hacks to make big inroads into your mortgage

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