Many of the banks and lenders have in turn dropped their interest rates to provide some temporary relief to home owners and hopefully free up some cash for us to spend in the economy.

For me however, I have very different ideas about how to handle these rate drops. Here is how I am using the interest rate cuts to future proof my home loan, largely because I know that one day soon the rates will begin to rise again.

Nothing too good to be true last forever.

The catch 22 of interest rate cuts

The reason the RBA cut rates and push the banks to pass on the savings is to help stimulate the economy. It is to get Australian’s spending money, which in turn keeps people employed which in turn creates more money for businesses and Australia as a whole.

This is why the idea of using an interest rate cut to better pay off your home loan is a catch 22. It is personally good for you – while sort of stifling the economic plans of the country.

Bitter sweet or not, I don’t want to be in debt for the rest of my life, so I use the rate cuts to my advantage, even if it isn’t how the RBA are intending me to use it.

Get ahead on your home loan…while you can!

As the rates are historically quite low right now, many people have finally afforded the ability to buy their own home.

Rates won’t stay low forever and using this time to your advantage is key. I pay more than the minimum amount towards my mortgage every fortnight (best to pay fortnightly if you don’t already as it saves you interest) – this means I am ahead of schedule for repayments and aiming to pay my mortgage off in full, many years before I am meant to.

A dollar on your home loan is worth much more

The best thing about a mortgage and making extra repayments is that putting even a dollar extra onto your home loan gets you ahead. A dollar isn’t worth just one dollar on your home loan – it is worth much more as you are saving interest over many years.

This is why it is vital to be paying extra to your home loan. Imagine if someone said to you, ‘give me $5 and it will in turn save you $50’ – that is what it is like when contributing extra repayments to your home loan.

If interest rates were to rise, could you survive?

If rates are currently around 6-8% now – would you be able to afford your house if rates went back to 11-12%? I did the calculations on my own home loan and have to say – it scared the hell out of me.

Paying extra now while rates are low means a greater buffer on your home loan should rates rise again. No point plodding along in the good times if you can’t afford the bad times (which like anything financial, come and go quite often).

Why not set a goal for the year to get 6 months of extra repayments into your redraw facility? This means finding out what you pay per year, dividing by two and then dividing again by the number of repayments you make per year – this means you get a number that will tell you how much extra you need to pay per fortnight.

It may only be a small amount but it’s lasting benefit on your home loan will be huge.

Do you do this?

Are you someone who is using the low interest rates to your advantage? Tell us below your strategy.

While we wait to hear whether all lenders have passed on the full rate cut – we figured it would be timely to look at a few ways you can buckle down and focus on repaying our home loans as fast as possible.

Here are some thoughts on how an interest rate cut can benefit your repayment plans.

What the rate cut means in dollars per month?

On a loan of around $300,000 – an average saving of $49 is made. It doesn’t sound like a whole lot of money, though if you pay that extra $49 per month onto your laon – you can save around $13K in interest and shave 1 year off your mortgage.

How can you use this rate cut to your advantage?

While some will opt to take the extra $49 cash in hand per month – the smart people will continue to let it be deposited onto their mortgage. Like we showed above, it shaves a hell of a lot of interest and time off your mortgage.

In fact, now is the time to pay even more towards your home loan. Why not stretch yourself to pay not only that $49 but an extra $50 per month on top of that? This would take you to a total of $99 a month and save you over $26K in interest and shave an extra 2 years off your mortgage. See our article on lump sum repayments to understand further.

Another thought is to scrap your savings account and start to use your mortgage redraw facility to host your savings. This saves you a tonne of interest and is tax free, unlike that of a normal high interest account. Although you don’t earn interest, you actually do one better – save interest that will otherwise accrue and cost you a fortune over the life of your loan.

Rates will likely never get this low again

So you know what that means? It means stop putting off your plans to repay your mortgage. Get disciplined and utilise these low rates to blast your mortgage. When interest rates are down, your interest charges are smaller – that means you can use every second of this rate cut to add all spare money to your loan and reduce the term significantly.

Maybe it’s time to hunt down a better deal?

If your lender doesn’t pass on the rate cut – take 5 minutes to explore your options with other lenders. It might be time to switch banks or lenders and find a better deal.

E.g. you might sell your car as you know longer need it. If you receive $5,000 – put it straight into your account and then continue contributing to the account for another 2-3 months. Works very well to prove your dedication.

What assets can you sell to boost your genuine savings?

When I was applying for my loan, I sold my pride and joy (a car of the faster variety). After that, I used the equity I had paid off in the car price to put directly into my savings account.

I then went on to sell a whole heap of furniture and unused household items. This included my Playstation that came with my TV and furniture I would no longer use if I got approved and bought my own house. This helped me save a bunch of extra dollars easily that contributed to my savings account and proof of repayment ability.

What if your home loan supplier doesn’t accept your lump sum deposits as genuine savings?

Firstly proove to them that the car or other equipment was purchased via a loan also. A loan you religously serviced and always paid in full. This shows dedication and an understanding of the commitment that comes with a home loan.

From there, if your potential future home loan provider is still not content that the asset lump sums are proof of genuine savings, ask them to check with their manager as otherwise you will have to take your business to another provider.

This upfront questioning will make most home loan lenders squablle for your business and ensure they give you a deal that gets you over the line.

Some lenders will only want to see after tax salary payments directly into a savings account, though some more contemporary lenders will allow you to demonstrate genuine savings in more creative ways. Inspiration was from Kristy Sheppard, spokesperson for Mortgage Choice.

Rental payments as genuine savings

If you are currently renting, you will likely be paying regular and set amounts of rent. This can act as proof of genuine savings with the right lender. Ask around the different home loan lenders whether this can be used as demonstrated earnings as it can greatly speed up the process of approval.

Some of the more traditional banks will not count this, though we see this as further evidence of your ability to service a loan so definitely recommend asking whether this can be taken into account. It has worked for many people I know who were struggling to boost their credentials as a worthy candidate for getting a home loan.

What if your home loan lender doesn’t accept rental payments?

Ask them to reconsider or you will have to investigate taking your business elsewhere. As we have written before, those that dont ask the awkward questions will inevitably lose out.

Competition is fierce and unless you have a bad credit history, a simple request will start the ball rolling on this with just about all home loan lenders.

A Co-Signer

This one was suggested by Investopedia. I am not, in the slightest, suggesting you get someone to cosign your mortgage if you’re getting knocked back for valid reasons. If you think you won’t be able to repay your mortgage, there’s no way you should be landing that kind of trouble at someone else’s door. But if you have income that isn’t being considered, for whatever reason, cash in hand, start-up business, asking someone to cosign might work. As long as you both are aware of the financial and legal obligations that go along with that kind of decision.

Wait

Maybe the time isn’t right. Perhaps a couple more years doing what you are doing is the best option right now. You’ll get a chance to pay off more of your debt, build up a bigger money pot for the deposit and spend a couple of years working out what you really want in your first home. Housing market conditions are an immensely fluid thing- interest rates, the apprehension of the economy, how much is on the market, all of these things go up and down. Be prepared to ride the swell, until it is the right time.

Reduce Expectation

This is your first home, it’s not necessarily going to be a dreamboat. If you can’t get any luck qualifying for a mortgage, maybe it’s time to reconsider what you really want. Do you want to buy now, or are you wiling to wait until you have more capital? If you want to buy now, what matters to you? Could you have less bedrooms, or bathrooms, or could you move to a part of town with less expensive properties? Know what is a dealbreaker and what aspects of the house you could compromise on.

Different Lender

Shop around. There’s no need to take one rejection as if it is the last you will ever, ever hear on the matter of a mortgage. Go a second lender, and give it a swing. There’s no need to show you are starting to feel panicked, as that kind of emotion can be catchy. You’ll get there in time, so just take it all as it comes.

Two Heads

Before you commit to this option, you need to think very seriously about it. If you have someone who you trust completely and have a good, honest relationship with, why not think about teaming up and buying something together? If you aren’t sure about the solidity of the relationship, don’t go there. It’s a long-term option and things can get very complicated, so be certain before taking the step.

The Affordability Test

Can you really afford the loan payments? Sometimes we can get slightly delusional about what an extra $200 or $300 a week would mean in reality. Try and live for a month or six months putting aside that extra money and see if you can get by with a level of comfort. Can you manage that level of debt? When you evaluate your credit cards, HECs debts, car loans, insurance, can you really afford to add a mortgage repayment on top of everything else? HOw much space will you have should interest rates spike? Would you be sucked under should there be another financial crisis? And what will your credit look like when all is said and done? It’s going to be necessary to ask these hard questions now, before you commit and things get much trickier.

The Quick Exit Test

At this point in my life. things are without a doubt in flux. I have a couple of casual jobs and a career that means I move around a lot. The idea of owning my own home appeals to me, especially as security and a place to thing of as a base. The problem is, should anything change too dramatically, I can’t assume I could sell my house quickly and avoid big financial problems. After all, it was (and continues to be) the major downfall of the mortgage crisis in the States, that people assumed they could sell their homes on, which turned out to be impossible in the soft property market. Renting, on the other hand, has no such drawbacks. Pay the first and last week of rent to the agent, as well as a bond, and you are covered for any ind of setback. Should things go pear-shaped, you can bail pronto- find a cheaper place, move back with the olds, move town quickly- so your exposure in minimal. You need to assess clearly what suits your present state, and what will continue to work for you over the coming 5- 10 years.

The Black And White Test

Everyone is pretty aware of the stereotypes that surround real estate agents and lenders- not the most positive, selfless of reputations. And while most of them aren’t trying to do the dodgy with you, the reality is that their income is dependent upon commission, so it works for them to convince you to sign with them. You need to wade through all the talk and spend some time with the black and white of the contract. Get a lawyer to look it over and make sure everything is as it should be, because the friendly conversation you’re having with a lender about to amass you with half a million dollars worth of debt isn’t necessarily unbiased.

You’ve Got To Go With The Banks

There’s a weird discourse floating around the banks at the moment, with NAB advertising how it ‘broke up’ with the other banks as if they were a couple. Funny briefly, but what’s funnier (or, perhaps, just more apt) is a sign I saw on a credit union stating “While all the banks are breaking up with each other, we’re going to be looking after you”. Bam. Other kinds of lenders can be as good as the banks, and if they take deposits, they’re also regulated by APRA. So don’t just go Big 4 immediately. Do some research about who is going to suit you the best.

Any Loan Will Do

There are ghost towns all across America which are testament to how false this misconception is. Property is important, and it’s easy to feel that you are missing out and you just need a house at any cost. But taking any kind of loan, at any kind of price, irregardless of the value of the house you are buying is never going to be a good idea. You have to be able to borrow an amount that you can reasonably pay back.

It’s The Lender’s Responsibility To Ensure I Can Afford It

Again, the kind of thinking that will get you into a tad bit of trouble. You know your finances better than anyone. You might hope that you didn’t, you might lie to yourself about it but at the end of the day, you know whether or not you can afford a loan. It’s a mutual responsibility, on behalf of yourself and the lender to ensure that you can pay back the loan and they don’t get jipped.

It Doesn’t Matter Where The Deposit Came From

This was a misconception I ran with for a long time. Contrary to popular opinion, if you’ve been partying it up and spending every time and suddenly inherit a deposit, you might still not get approved for a loan. Lenders don’t want to know what you do with a lump sum gift, they want to know if you can save and budget, because they’re looking at 30 years of repayments and no one on this earth gets that many gifts.

Credit Card Limits Don’t Matter

I don’t pretend to understand the nuance of credit ratings, but this is a great piece of advice from Peter Boehm. Lenders don’t just care about how much money you’ve spent from your credit card, they care about your limit. The reason being that you could realistically spend up to your limit, thereby hampering your ability to pay back the loan. It’s a good reason (well, one good reason among many) to lower your limit.

The Lower You Go, The Better

It makes so much sense to sign up to home loan with the cheapest rate. But a bit of cynicism won’t lead you astray- why is it so cheap? Are there strings attached, or high fees hiding somewhere? Work out what features of a home loan are a must for you- to suit your lifestyle, your financial goals and objectives, then look at the numbers. Go with someone you trust.

Fixed Over Variable

Again, there’s no tried-and-true in this situation. If you need flexibility, maybe a fixed rate isn’t the best option for you. On the other hand, if you need certainty and want to be able to budget for the next 10 years on a certain repayment rate, it might be a good idea to sign up to a fixed rate. You’ll have to bear the risk of paying extra should interest rates drop, just as someone who is variable will have to face the risk of high interest rate jumps.

Paying The Minimum

Another hotly debated home loan topic. Some people say that the home loan is the cheapest loan you get, and you should stick to your minimums and invest your money elsewhere. Other people calculate the cost of interest, and suggest paying off the mortgage as fast as possible to save money. The choice is up to, and what suits you best financially. The important thing is to know what you would prefer, and to check whether the lender allows extra payments before signing on.

Deposit Is All You Need

Scraping together the deposit can be hard enough, but it’s important to have extra money up your sleeve for other costs. You don’t want to be kicked in the teeth unprepared by stamp duty, or maintenance costs, legal costs or inspection fees. Save up enough money to bolster your through all that- it might delay your purchasing plans a couple of months, but it will help keep you out of a debt spiral.

Roll All In One

You can consolidate all your debts, and it could be a great approach to tackling debt as a whole. First, however, you have to be sure that your home loan allows for it, and your property has to have enough equity. Make sure you understand the full costs of rolling them all together before doing so.

Extending Your Loan Saves

I’m from the get-rid-of-debt-fast side of the fence. A lot of people would disagree. They would suggest that extending your loan would allow you to save money with reduced mortgage repayments. While that may be true, the extra interest that will accrue in that period might make it all a redundant endeavour. Whatever you choose, just ensure you’ve weighed up all the finances and worked out what will help you to be financially secure in the future.

Open Your Eyes

A doe-eyed view of mortgage repayments is the number one way things can go wrong if you buy a house. Having a mortgage is going to impinge on your lifestyle, and thinking otherwise is naïve. Something will have to give- travel, expensive dinners out, subscriptions to the opera and symphony. Not necessarily everything has to go, but these are decisions that are going to have to be made. Pretending otherwise will only get you into debt. Keeping tabs on your mortgage repayments and lifestyle is of paramount importance- if you feel like you’re slipping into bad habits, you can track your spending and make the necessary changes to get back into the black. The other obvious mistake is to sign up to a mortgage that’s too big. Don’t get a mortgage you can barely afford, because things will change. You might lose your job, interest rates might change, you might start a family. Put together some projections and make sure that your mortgage repayments can accommodate all of these changes, and more. An ability to absorb extra financial stresses is key to staying in the clear on your mortgage.

The Mortgage Is Only The Beginning

Your mortgage repayment is the bulk of the money that your house will cost you. Provided you don’t do renovations. Or have to put together a huge refurbishment. And even if none of these things happen, there are still taxes, utility costs, repairs, upkeep. It’s estimated that these can cost you as much as 40 to 50 percent of your mortgage repayments on a monthly basis. It’s like a car- the upfront cost is no indication of how much money you will have to spend on it as the years progress.

Easy Mistakes

Getting a home inspection, and then not reading it. Generally, there’ll be a couple of things that might be pretty helpful to know straight up. Or you think you can handle putting 60% of your income towards the mortgage repayments. Unfortunately, that might leave you a bit shrift when it comes to actually buying food. So you put your groceries on your credit card, and spiral into debt that way. Or you start renovations, and never stop. Learning to be patient is a big part of successfully dealing with home ownership- renovate the absolute necessities and leave the rest until you can afford it. Furnish your house cheaply, and save up for the luxury items you desperately want. Plan for ten years, not ten minutes.

What To Do

Analyse your spending to know where all your money is going. Think ahead so you know that you can deal with maintenance. Have a buffer zone of three to six months living expenses should anything go wrong. The last thing you want is to be another person who has to sell at the wrong point of the housing market or for a price that will leave them worse off. Think smart, and think long term.

Why Do You Want To Buy A House

Does it fit into your financial plan, or is it because everyone you know talks about mortgages at dinner parties and you feel left out? Understanding your own motivations when it comes to home ownership is crucial, because you have to know it’s worthwhile and you can stick with it once the mortgage repayments rear their ugly heads. Does home ownership fit into your long and short term financial goals? If you haven’t worked out your financial plan, sit down and assess that first before signing on the dotted line.

What Values Will I Honour By Buying Or Renting?

What do you want in the next five years? The flexibility to travel? A place to start a family? Personal finance advisors suggest thinking about your five year plan, and whether renting or home ownership suits that plan better. The timeframe is because you’re likely to keep the house for at least five years, or risk selling it at a loss. Is the house you desire in keeping with your projected financial situation over the next couple of years? Both are completely viable options, you just need to consider which one will suit you best.

Are You Ready For Home Ownership?

Home ownership is (I imagine) a bit like car ownership, it breaks your heart. Your home is not only a pace for you to live, but also an asset. You improve the space around you to improve your quality of life, but also so your asset doesn’t depreciate and your resale value is improved. Home ownership is not just about choosing matching colours. It appears to be about scraping and cleaning and gardening. It’s a tough task, so you’ve got to know that you’re up for it.

Do You Have A Steady Job Of Income

Getting approved for a mortgage is no walk in the park. Even inheritances don’t count towards earnings, so before you decide to buy a house, you’ll need to be on provable, consistent and quite good earnings to get approved. Understanding your own financial situation thoroughly will allow you to gauge the amount you can spend on the house, and will allow you to address issues before they become problematic.

Do You Have The Deposit?

Getting a deposit together is a huge ask, but without it you’re likely to be thrown to the mortgage wolves and end up paying huge amounts in interest. On top of this, you need to calculate the costs you will be liable for in monthly repayments should interest rates rise. If the past couple of years have taught us anything, it’s that the mortgage repayment buffer zone is the most important zone in town.

How Much More Are You Up For?

Talk to a financial planner about how much more money per week you will be spending on a mortgage as opposed to the rent you’re currently paying. Pretend you’re paying it for a couple of weeks, and see how you cope. You want your first home owning experience to be a fulfilling one- challenging, but not impossible. Ask yourself these questions and you’ll be prepared for buying a house, or staying on the rental market.