While you may be repaying your home loan relatively easily right now, anything can happen, you may find yourself in a situation where you wish you had a home loan buffer to fall back on.
But what is a home loan buffer, and how can you build one?
What is a home loan buffer, and why it is important?
A home loan buffer is an amount of money you have set aside to pay for your home loan if you ever suddenly find yourself struggling to meet the repayments. If something bad happens (like losing your job) the mortgage still needs to be repaid, and spending too long in arrears can result in your home being repossessed by the lender.
Building a home loan buffer can help you avoid this situation by having some thousands stored away so you can meet those repayments even if your income drops or you have other big expenses to pay.
So if you’re in a good financial position now, it might be a good idea to start building that home loan buffer now - say enough to pay for three to six months worth of mortgage repayments - should a worst-case scenario ever arrive.
Plus, even if the good times never end for you, building a home loan buffer can be a great way of paying a little extra into your home loan, which in turn can shave thousands of dollars off your overall loan cost.
How to build a home loan buffer
When building a mortgage buffer, think of it as a kind of separate fund attached to the home loan that you pay into in addition to your regular monthly repayments.
There are a couple of strategies you can employ to build up your home loan buffer.
Make additional repayments
Making additional home loan repayments above the minimum required can help you get ahead of your home loan. This is particularly important in this current low rate environment- if your home loan interest rate has decreased lately, by not lowering your repayments to the minimum, you can actually pay off your home loan faster and save thousands if not tens of thousands in interest.
Let’s use an example. Say you have a $400,000 home loan (variable, principal and interest repayments) for a 25-year term at an interest rate of 3.00% p.a. Normally, this loan would cost you an extra $169,000 in interest over the life of the loan. But, if you paid an extra $200 per-month into that home loan, you could save almost $25,000 in total while also shaving more than three years off the loan term.
But how does this help you build a home loan buffer? Well, these additional repayments can be paid into an offset sub-account, which is where the home loan buffer can be stored, and withdrawn from if necessary.
Use an offset sub-account
An offset sub-account is a sub-account linked to your home loan where you can put money that reduces the interest payable on your home loan. Then, if you ever need to, you can withdraw this money, meaning it acts as a way to save on your home loan in good time, then in hard times can help you get by.
At loans.com.au we provide a combined 100% offset sub-account, where 100% of the funds deposited offset your loan balance while giving you the opportunity to draw on 100% of these funds should you ever need to.
You should know that redrawing these funds mean you’ll no longer get the benefit of offsetting your loan balance, but if you’re in dire financial circumstances, this could be a price worth paying.
To apply for our offset sub-account, book an appointment with one of our friendly lending specialists today.
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