With recent local flooding and storm events, many people have found themselves in a position where managing home loan repayments presents a challenge due to not being able to work for a period of time or having unforeseen expenses not usually encountered. Fortunately, most banks came to the party and provided relief packages to help their customers by providing repayment holidays for loans and insurances, and access to term deposits and overdraft facilities without the usual restrictions that apply to such facilities.
However, there may be other times, not caused by natural disasters, when having a plan to minimise home loan expenses could ease household costs and provide a greater cashflow of funds. We’re not talking about the usual belt-tightening and budgeting strategies, (Although these definitely help!) but ways that you can amend your home loan repayments in order to reduce everyday expenses.
The first one that many people think of is a Loan Repayment Holiday. This is when you elect to delay repayment on your mortgage for up to three months, with the missed payments being tacked on to the end of your loan term. These are only available in times of hardship, and the bank need to be comfortable that at the end of the repayment holiday, the cause of the hardship will have passed. Obviously the benefit of such an option is that you can access additional funds normally spent on loan repayments to go towards other expenses, but it needs to be remembered that loan costs will continue compounding and will be added to your borrowing later on, increasing the total cost of your borrowing. A loan repayment holiday may only be requested once in any two year period and is definitely a last resort option.
Extension of Loan Term is an option that can be requested if repayments feel too high and you have previously elected to set your loan up for less than the maximum term available. Lenders will want to know the reason for the change in loan term and will usually require a full application to demonstrate that the ability to repay the debt is still evident. The other thing to be mindful of if considering extending the term of your loan is that the longer period will accrue additional interest payments, which will in turn drive up the total cost of your borrowing.
Interest Only Payments are a very successful option if you have funds going to other loan payments and want to minimise the expense of one of your loans. This type of loan payment is also ideal if there has been a change in family income due to maternity leave or employment status, and you wish to reduce your expenses until such time that both borrowers are working full-time again. The other time that Interest Only Payments work very well is when building a home and funds are being drawn gradually at each stage of the project. By paying the interest on the amount borrowed only, you can keep your costs down until such time that the build is complete and you know the final loan amount required, at which stage you can choose a loan structure that best suits your budget and future needs. You may even choose to retain a portion of borrowing on an Interest Only, Revolving Line of Credit facility, which requires you to pay the interest amount only, but allows you to put larger amounts against the principal amount, reducing your debt at a faster rate and saving you money in the long run.
