Having a home loan means a number of things;
1. You live in and own your own home (yes!)
2. You have a payment plan in place to pay off the money you have borrowed.
3. If you have a variable loan, the interest you pay back is influenced by the overall market rate.
At times like this, where interest rates are at an all-time low, homeowners may want to consider building a buffer into their home loan.
What is a home loan buffer?
Simply put, a home loan buffer is like an additional piggy bank tied to a home loan. People may accumulate a buffer if they have been in a fortunate financial position that has enabled them to put extra money aside. Take the current drop in interest rates for example. Households may choose to take advantage of the market and build a buffer into their mortgage, which allows them to get ahead on repayments.
Why do you need a home loan buffer?
A home loan buffer can help households create a backup for their budget. Building up such a buffer when the market is favourable is a great way to protect yourself from future changes that may not be so beneficial. When circumstances change, like sudden hikes in interest rates, a job movement or any other unexpected events that require more financial support, homeowners can find themselves in financial trouble. That’s why a buffer is such an advantageous thing to try and build. It can give peace of mind and act as a support should financial circumstances change and you find yourself requiring additional cash flow.
Furthermore, it’s a great alternative to cutting monthly mortgage payments as although you’ll pay less each month, the time it takes to pay off your overall loan will remain the same.
Different ways to build a buffer into your home loan
If you think building a buffer into your home loan sounds like something you’re interested in achieving, there are many ways to do so:
Making extra repayments
Paying a little more than you should each month could save you a significant amount in interest on the mortgage and see you pay off the home loan a lot faster.
For example, imagine you have a $300,000 home loan at an interest rate of 4.95% for a loan period of 30 years. If you’re able to pay an extra $75 off per month, as well as your regular payments, you could save around $23,685 in interest fees, and shave an estimated two years and four months off your repayment plan. BOQ’s extra repayments calculator is a great tool for working out exactly what you could save when repaying different amounts over different interest rate figures.
Save into an offset account
Regularly saving extra money in an offset account that’s linked to your home loan account is another way to build a buffer. Doing so will reduce the amount of interest you pay on your home loan as the account’s balance is ‘offset’ against the home loan, meaning you’re only charged interest on the difference between the two. This strategy is useful for homeowners on either a fixed or variable home loan as it is not influenced by the way interest rates move.
Make sure your home loan has flexible features
Making additional repayments and linking your home loan account to an offset account are great features to make use of, but does your home loan allow for such flexibility? Making sure you have a home loan that gives you freedom to make the most of these features is important when you want to begin building a buffer.
If you’re looking for a more flexible home loan option that better meets your requirements, the personal banking team at BOQ can help. For more information on our types of home loans and rates, why not pop into your local BOQ branch today?