The realities of mortgage repayments

Month-to-month repayments

Whatever home loan you choose, the make-up of your monthly repayment will remain unchanged. This includes two components: a portion of the principle loan and the interest you owe on your outstanding loan (whether this be a fixed rate or variable rate home loan).

However, if you have an interest-only home loan then the monthly repayments will differ so make sure you are aware of what this type of loan entails.

Understanding interest

Australia has been enjoying record lows this year with the Reserve Bank of Australia confirming the cash interest rate of 2.25 per cent for the month of March. So, what does this mean for your mortgage repayments?

Mortgage providers increase or decrease their rates to reflect the movement of the set cash interest rate. Advertised rates currently sit at around 4.5 per cent interest, depending on the provider. While a fixed rate home loan safeguards you from fluctuating interest rates, for those locked into a variable rate home loan, a lowering cash rate usually means the interest on their loan will also decrease. While this is reason to celebrate, don’t forget that low rates will likely not stay low forever.

To understand just how phenomenal the impact of the interest rate on your mortgage is, consider the following example. For a standard 25-year variable rate home loan, the monthly payment on a $200,000 loan would be around $1112 with a 4.5 per cent interest rate and no monthly fees. Should this drop or rise just one per cent, this will fall to $1001 or rise to $1228. Over the course of the loan, fluctuations that may be as high as $100 per month can quickly devastate your savings, so it’s important your repayment plan has contingency measures in place should the interest rate spike.

As the loan matures

As the market conditions change, it’s important you take the opportunity to refresh your financial approach. Talking to a financial advisor can help you make the right call, but here are few options that you have for adjusting your mortgage:

• Refinancing. Take advantage of low interest rates and consider moving to a new loan, which may be cheaper. While there may be exit costs (for those loans signed before July 2011) and entry costs associated with refinancing, you generally recoup these costs over the life of the loan.
• Taking advantage of low interest rates. While rates are low, take the opportunity to get ahead on your mortgage repayments. If you make a substantial repayment during this low period you will not only reduce your overall loan balance, but will be saving on potential interest that you could be charged in the future.
• Fixing your loan. If the interest rate is low enough, why not lock in the new low rate?

When it comes to mortgages, it pays to understand the market conditions. Enter into your loan with a financial plan, however don’t hesitate to refresh this approach should the conditions change in your favour. Always consult a financial advisor when considering your options.