Home Loan Payments Provide a Buffer

Posted on March 24th, 2014 · Posted in News

With interest rates at record lows, households are taking the chance to get ahead on their mortgages.

Instead of cutting their monthly mortgage payments in line with interest rates, a large number of borrowers are paying the same amount, and paying off the loan more quickly.

The International Monetary Fund this month said these mortgage ”buffers” – held in mortgage offset and redraw facilities – were worth 14% of outstanding home loans or more than $160 billion.  Put another way, the country’s households have 23 months’ worth of minimum mortgage payments to fall back on if things go pear-shaped. For the economy, these buffers mean households could absorb temporary shocks, such as higher unemployment.

Another advantage of paying off a mortgage early is it gives you a guaranteed return equal to your home loan interest rate.  In contrast, making an investment in shares has the potential to pay higher returns, but this is not guaranteed. It could also result in loss.

”Repaying your home loan at whatever the interest rate is at the time is akin to receiving that return on another investment, but this investment’s guaranteed,” Hewison Private Wealth director Andrew Hewison says.

It may sound obvious, but paying off debt faster will also free up cash to invest elsewhere.  AMP financial planner Andrew Heaven says when it comes to paying off debt, the top priority should be reducing ”bad debt” such as a personal loan used to pay for a holiday.  The next priority is to reduce ”good debt” – held against economic assets, such as a home.  ”That enables you to have free cash flow to redraw that money to go and invest.”

Of course, there are some instances when it may make sense not to pay down mortgage debt so quickly. Hewison says that for some people closing in on retirement it can make sense to make concessionally taxed super contributions instead.

Overall though, it appears households have been pretty sensible in paying off their mortgages ahead of schedule.

If you’re looking to refinance or you’re unsure of what to do with your loans, contact us today for a FREE finance review and let Infinity Partners Finance help you Strengthen Your Financial Future.

 

Original Story Source :: watoday.com.au