Managing your loans and mortgage
As it’s far easier to get into debt than out of it, make sure that you really understand the fine print attached to any loans and mortgages you may take out before you commit to them.
When should I take out a loan?
You should only borrow money when you know you can afford the repayments – always look at the repayment total including interest when considering a loan.
While it’s always best to save for the things you want, when you do borrow money, always choose the shortest repayment period you can afford – this is particularly important when you are borrowing money for something that will devalue (a car) or be used quickly (a holiday).As saving the entire sum needed to buy a home isn’t realistic, borrowing money to buy a house makes good financial sense because property usually retains or improves in value over time. Additionally, converting the cost of rent into mortgage repayments means that your living costs are being invested in property you own.
How much should I borrow?
Only borrow the amount of money you need – avoid the temptation of taking out a bigger loan simply because a lender has offered it to you. If interest rates increase, your monthly repayment will increase and this could get you into financial trouble in the long term.
You may be borrowing too much money if:
- your home loan repayments cost more than a third of your take home pay, or
- your total loan repayments cost more than half your take home pay.
Do a trial run before you borrow. Try saving an amount equal to your loan repayments each month, or saving the difference between your rent and home loan repayments (include the one-off costs, such as stamp duty and moving house).
What’s the best loan for me?
Usually it’s the loan with the lowest interest rate. This is often the single most important thing to get right, so shop around. Even small differences in interest rates can make a big difference to the total amount you will pay, especially with long-term loans. Extra features that cost you more in interest rates may just waste money.
Look for the ‘comparison rate’ which takes fees into account. ‘Honeymoon’, ‘introductory’ and ‘low start’ loans may sound appealing, but once the honeymoon ends, you could end up in a more expensive loan.
Check that your loan allows you to make extra payments, and if there are any fees for doing so.
Loans with fixed rates may:
- not allow extra payments or, if they do, will commonly limit the amount you can repay over the life of the loan
- charge very high extra fees for paying out the loan early
How can I compare loans?
Make sure you know what current rates are when you are doing comparisons. You can easily search for these online.
Consider all types of lenders: credit unions, building societies, banks and non-bank lenders. Loans with the lowest rates of interest may not be the most heavily advertised. Mortgage brokers may be able to help you find out about suitable loans but they may not offer all the low interest home loans available.
Which loans should I pay off first?
Always ensure that you pay at least the minimum amount due on every loan on time. If you can afford extra payments, tackle the loan that attracts the highest interest. The lowest-priority loan is one that has tax-deductible interest, for example, an investment property loan.
Should I try to pay off loans and mortgages faster?
Paying off your loans and mortgage faster can save you thousands in interest payments.
- One simple way to pay things off faster is to make payments fortnightly instead of monthly - this will have the effect of making 13 monthly payments a year instead of 12.
- If you have some extra cash, you may want to consider reducing your loan balance – this will decrease the overall interest you pay on a loan in the long term.
- Be careful about refinancing to pay off loans faster – ultimately, your can only pay off loans faster if you pay more money. Be sure that the savings of refinancing outweigh the costs before you start down this path.
Find more relevant information on managing your finances:
- Best finance advice
- How to deal with debt
- Insurance - protecting you and your family
- Loans, families and relationship breakdowns
- Managing a joint bank account
- Switching bank accounts
- Using a financial counsellor
- What to do if you lose your job
This article was created by Ella Walsh for Kidspot - New Zealand's leading parenting website. Sources include the ASIC.