As a homeowner, 2021 could be the year you take charge of your finances. After all, with record low interest rates, greater competition between lenders and more home loan products on offer than ever before, there’s no excuse for not getting taking control of your money and giving yourself a brighter financial future.
1. Understand where you stand
Before you take steps to master your finances, you should always know exactly what situation your finances are currently in. That means getting an accurate picture of your assets and liabilities – and especially understanding exactly how much debt you have right now.
Start by figuring out what you owe on high interest loans, such as credit cards, personal loans and car loans. This is the kind of debt that can leave your finances worse off, and which you can – and should – do something about.
Also, read your home loan statements to find out exactly what you owe on your home loan and how this compares to the overall value of your property. This could be one of the real keys to reducing your debt repayments and getting on top of finances. That’s because many lenders now offer lower interest rates to borrowers with a low loan-to-value ratio or LVR (generally under 60%). To calculate the LVR, simply divide your loan balance by the value of your property.
2. Consolidate your debts
Paying too much interest is one of the real barriers to getting ahead financially. So it’s time to work out what you can do to reduce it.
Generally, credit cards come with much higher interest rates than personal loans. And personal loans, in turn, come with much higher interest rates than home loans.
Consolidating each of these debts into your home loan or another low interest rate loan could make a real difference to the amount of interest you’re paying each month and give you the opportunity to take better control of your finances.
Just be warned, however, that by rolling your debts into your home loan you could pay more interest in the long-run even though you’re paying much less in the short-term. That’s simply because a home loan often lasts longer than a personal loan, so more interest accumulates over time.
3. Get a better home loan deal
Regardless of whether you’re looking to consolidate debt, this is a good time to get a better deal on your home loan.
Not only is the official cash rate lower than it has ever been, the mortgage market is more competitive too. New non-traditional and online lenders are offering new borrowers low introductory interest rates, while the big four banks have also reduced their rates to compete.
This means that from the end of 2020 you can now get a fixed-rate home loan with an interest rate at around 2%. There are also fantastic deals available on variable rate home loans. If you’re paying more than this, now is the time to compare your mortgage, then call your bank and ask if they’ll match what’s on offer in the marketplace.
If they won’t, you should seriously consider refinancing your mortgage as a step in getting ahead financially.
After all, the difference between an interest rate of 4% and an interest rate of 2.5% on a 25-year mortgage for $600,000 is an impressive $475 a month or $5,700 a year. Imagine what that extra money in your pocket would do?
4. Pay down the mortgage
Paying off your mortgage early could be one of the most important things you can do when it comes to getting ahead financially. So, if you’re not making extra repayments, 2021 could be a great year to start.
There are generally two main ways you can make extra contributions – either through an offset account or redraw facility. While both effectively reduce your loan principal and let you pay off your mortgage before your loan term expires, they do it in slightly different ways.
A mortgage offset account is a savings account, which instead of paying you interest, offsets your loan principal and reduces the amount of interest you pay. Meanwhile, a redraw facility lets you put extra money into your home loan which you can then withdraw later if you need to.
Just be warned that some lenders and some loan products will limit the amount of extra repayments you can make without attracting a penalty, so read the fine print before using this approach.
5. Invest in other assets
While it’s always good to pay off what you owe, the truth is that not all debt is bad debt. Sometimes, you can borrow money to make money simply by directing your debt into assets when their value is likely to appreciate.
For instance, once you’ve built enough equity in your own home, you may be able to borrow against it to buy an investment property. If you lease that property out, you’ll have someone contributing towards the cost of your mortgage through rental payments. You may even qualify for generous tax breaks, in the form of negative gearing and depreciation.
That said, an investment property isn’t the only way you can build your wealth. You could also choose to build your wealth by investing in assets such as shares or managed funds. You may also be able to borrow against your home to do this too.
As with any investment decision, this approach isn’t risk-free and you should discuss your plans with your financial adviser first.
6. Get insured
While getting your finances in order in 2021 may be largely attacking debt and growing wealth, it also pays to play defence too. The right insurances can protect you and your family if the worst happens – such as if you lose your job, get ill or injured, or even die.
If you have a family or other dependents, you should consider taking out life insurance. However, you may consider mortgage repayment insurance too (this is different from lenders mortgage insurance which protects the lender if you default).
Other insurances you should think about include income protection insurance, which provides a monthly benefit if you’re out of the workforce and total & permanent disability (TPD) insurance, which may cover you if you’re permanently injured.
7. Stay the course
Just like becoming physically fit involves dedication over a long period, becoming financially fit isn’t about taking a lot of action all at once and then doing nothing ever again.
So, while 2021 may be the year you get your finances in order, you really need to keep going well into the future. For that reason, it’s important that you take realistic steps that you can continue over time. It’s also important that you don’t fall back into bad habits once the thrill of saving money and getting ahead financially wears off.