How to Manage a Home Loan

Tips for Managing and Living With Mortgages Successfully

Oct 18, 2009

To manage a home loan efficiently, get the right mortgage, use redraw facilities wisely, make extra repayments, avoid adding more debts and review the loan annually.

Managing a home loan is a big financial commitment. For many people, the thought of owning a mortgage lender or bank hundreds of thousands of dollars is depressing. Unfortunately, getting a loan is often the only way for most people to buy a house.

There are, however, strategies to manage and service a home loan successfully. The following are some tips for living with mortgages comfortably.

Managing a home mortgage starts with choosing the right loan. This is important as the borrower will need to live with it for the next 20 to 30 years or so. A new home buyer must know how much he can borrow, the interest rates and other costs, whether he can make the repayments promptly, the necessary features of a loan, the loan term and loan flexibilities. Everyone’s financial situation and borrowing power is different. So it pays to do some research and compare different home loan products before applying for the suitable one.

Use Redraw Facilities Wisely

Many home loans now offer withdraw facilities that allow the borrower to withdraw money from extra repayments already made on the loan. However, taking money out of the loan will negate interest savings made by extra repayments. Plus, some mortgage lender may also charge a fee when redraws are made. To manage a home loan efficiently, use redraw facilities wisely. Create a household budget to plan ahead and keep track of expenses instead of relying on redraws every now and then.

Make Extra Mortgage Repayments

If a home loan borrower only pays the specified minimum monthly repayments, he’ll probably pay much more in interest than the original price of his home. For instance, a home buyer takes up a $300,000 loan for 25 years with the interest rate being 8.7% per year. By paying only the minimum monthly repayments, he will have to fork out $436,870 in interest only. He still has to pay back the loan principal costing $300,000 as well!

However, if the same borrower pays an extra $20 each week from the first month, he can save up to $56,614 in interest and potentially reduce his loan term by two years and six months. So whenever possible, make regular extra mortgage repayments. Use an online home loan calculator to work out the numbers.

Avoid Adding More Debts

Additional and new debts can hamper efforts in managing and living with mortgages. Credit cards incur more debts than other loans as they charge the highest interest among all loans – many up to 20% in interest if outstanding balances are not paid during the interest-free period. Avoid adding more debts by finding ways to slash spending and using credit cards only when absolutely necessary.

Review Home Loan Annually

Another way to manage a home loan is to review it annually. What seems to be the ideal home loan today may not be so in the next year. Mortgage interest rates fluctuate and products from other lenders may become more suitable. If the loan no longer lives up to expectations, consider mortgage refinancing.

However, do check the current loan contract to see if exit fees apply. Some lenders charge hefty exit fees costing thousands of dollars, which can wipe out any potential savings from mortgage refinancing.

Get Help if Repayments Cannot be Met

Borrowers who anticipate having difficulty making mortgage repayments should contact their lender as soon as possible. Explain the financial situation and find out the best way to resolve the problem. In Australia, some borrowers may be eligible for a “financial hardship” application as stipulated under the Banking Code of Practice.

Alternatively, they can seek free consultations from the Ombudsman. Those who’ve taken out home loans from banks can get advice from the Financial Ombudsman Service while those with non-bank lenders can contact the Credit Ombudsman.

Managing a home mortgage is a long-term game. Start by choosing the right home loan. Use redraw facilities wisely and make regular extra repayments whenever possible. Also, avoid adding new debts, review the loan annually, refinance the mortgage if necessary and seek help if there are problems paying up the loan.

ING Direct Home Loan Booklet. “10 Steps for Living With Your Home Loan” in Money Magazine. Australia: ACP Magazines, October 2008.

The copyright of the article How to Manage a Home Loan in Home Mortgages is owned by Wei Yin Wong. Permission to republish How to Manage a Home Loan in print or online must be granted by the author in writing.