With the Reserve Bank signalling it expects to raise interest rates in the future, Liz Koh has advice on how to get your mortgage paid off faster.
She says it's all about structuring your loan the right way.
Photo: 123RF
Liz Koh is a financial planner specialising in retirement planning. This discussion is of a general nature, and does not constitute financial advice.
Now is the time to blitz your mortgage, Koh tells Nine to Noon.
"We know we're on this cusp of mortgage interest rates going up.
"A lot of people just leave their mortgage in one lump sum and they fix it for a period of time. I'm a big fan of breaking it down into two or three components.
"You don't want to have your entire mortgage renewing at the same point in time, it's better to spread it out."
For people who are also saving money, Koh suggests using a line of credit or mortgage offset account.
"So what you can do is have part of your mortgage on a floating rate and that's either as a line of credit or with what they call a 'mortgage offset account'.
"Now, not all banks offer a mortgage offset account but how it works is that if you have a floating rate part of your mortgage, the money that you save into a savings account can offset that part of your mortgage so that you in effect pay no interest."
Alternatively, a line of credit works a bit like an overdraft, she says, you plough in all your savings and eventually reduce the balance to zero.
"But you know that you can withdraw that money at any time if you need it.
"So you can save a big lump sum in there and then when your fixed part of your mortgage comes up for maturity, you can take a lump out of that and pay it off that fixed component."
A mortgage offset account is a good way to keep your savings money separate from mortgage money, Koh says, and while the same can be achieved with a line of credit, the savings component is less clear.
For more information on these accounts, how to set it up and whether it's right for you, Koh advises people to chat to their bank or mortgage broker.
"You might want to pay the mortgage off quicker but if you're on a fixed rate, a penalty applies once you are paying it off at a certain rate. So you need to make sure you don't get caught off by that.
"There will be a certain amount that you can pay off over and above what you've said to the bank you'll pay off but beyond that there'll be a penalty, so this is a way to get around that problem."
Going forward amidst the uncertainty posed by the pandemic, borrowers need to factor in the impact of interest rates and their ability to repay their mortgage, Koh says.
People should consider what they'd do if mortgage interest rates were to go up by 2 percent, she says.
"If it was me, I'd be trying to use the difference between what you're paying now and what you would be paying if interest rates went up, use that money to save or pay down your mortgage now.
"It's a lot easier to just tighten your belt gradually then suddenly find you're paying out all this extra money on your mortgage."
