Tag Archives | mortgage

Wriggle Room

Wriggle Room

One of the traps of borrowing money in a low interest rate environment is not leaving enough spare money, or ‘wriggle room’ in your budget to cope with an increase in interest rates. This is particularly important to consider when you are buying your first home, upgrading to a more expensive home, or increasing your mortgage to pay for a new car or overseas holiday. There are several ways you can protect yourself from the effects of future increases so you don’t run out of money.

 Plan for an increase

When you are looking to increase your borrowing, do your budget based on loan repayments at a higher rate of interest. You will be able to pay off your mortgage more quickly while interest rates are low, and you can choose to keep you repayments at the same level if interest rates rise.

Have access to spare funds

Don’t borrow up to the maximum of your borrowing capacity. If things don’t go according to plan, you will have the option of increasing your borrowing. Have some savings set aside, preferably in an account where the savings will offset your mortgage to keep your interest payments down. Alternatively, have a line of credit into which you can put your savings. This has the effect of reducing the interest you pay while still having access to your funds if necessary

Fix the interest rate

Fixing the rate on at least part of your mortgage will give you certainty about your repayments. You may or may not save on the amount of interest you pay, but at least you will not be caught out with an unexpected increase in loan repayments. Remember that if you need to break the fixed rate, for example by selling your house, you may be charged a penalty.

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How to Manage Your Revolving Credit

Crunch your Credit

A line of credit, or revolving credit, is a very useful facility to have as part of your mortgage structure. The way it works is that you are committed to pay back only the interest each month and interest is charged only on the amount borrowed. Repayments of principal can be made at any time without penalty and the more you repay, the less interest you pay.
One key advantage of a line of credit is that if you run short of funds you can spend or withdraw up to the limit that has been set. This means that you can pay all your spare cash into your line of credit to keep the balance and the interest down, knowing you can grab it back at any time. If you have a mortgage, the best return you can get for your emergency savings is to ‘invest’ it in a line of credit. The return you get will be the interest you save on your borrowing.
Some mortgage brokers and lenders advocate using a line of credit as a transaction account for receiving income and paying all your living expenses. In theory, this will ensure your loan balance is kept as low as possible. In practice, this system usually fails because unless you are very disciplined it becomes almost impossible to keep to a budget. It is better to instead make a regular payment each payday into your line of credit to reduce the balance.
Some banks are now offering customers the ability to offset balances in a range of accounts, which is a great way to keep your savings separate from your mortgage. You will only pay or earn interest on the net balance of the range of accounts. The more you save, the more you will crunch your credit!

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