For most households July 1 dawns with barely a cross on the calendar. But just as January 1 prompts many of us to take a pulse check on our health and resolve to do better, the new financial year is the perfect time to take stock of our fiscal fitness.
Build a budget
It’s easy to lurch from payday to payday and bill to bill in the hope there’s more money coming in than going out. The best way to manage your money and ensure you are not living beyond your means is to set a budget and stick to it.
Building a true budget requires honesty with yourself about how much you actually spend. Consider all of your costs for an entire month – groceries, bills, loan repayments, clothing, coffees, school fees, entertainment and everything in between – and stack them against what you earn. If you find there is little left over or worse, nothing at all, it’s time to cut costs.
Consider expenses you can control versus those you can’t. Loan repayments, school fees, rent or council rates are fixed. But take-aways, movies or a new pair of heels are all at your discretion – and where you can cut back.
Axing one takeaway coffee from your work day can net you nearly $900 a year, while making your own lunch can save more than $1,800. Pare back on impulse purchases and eating out and your annual savings could soar.
Set some goals
Nothing spurs savings like something to look forward to, such as a holiday or even a deposit on a home. Build your savings goal into your budget and set funds aside as soon as you get paid. Better still, have funds debited from your pay into an account you can’t access easily, such as an online savings account.
Pay down debt
The new financial year is the perfect time to assess debt and make a plan to reduce it, starting with those debts with the highest interest. Consumers often make the mistake of paying extra off their home loan while carrying high-interest debt (up to 20 per cent per annum) on their credit card. You will be far better off financially if you clear the high-interest debt first. A $5,000 credit card debt at 17.5 per cent, for example, attracts $850 in interest a year, while the same amount on a 4 per cent per annum home loan costs just $200 in interest. Credit card providers must now outline to customers how long it will take to pay off their debt if they pay just the monthly minimum. Check out the numbers on your next statement and take steps to pay as much off as you can.
Organise your deductibles
Start the new tax year by knowing what you can deduct and sorting your receipts. Australian income-earners are entitled to minimise their tax so find out what you are allowed to deduct in your line of work and keep a record of all relevant receipts, even if it’s just in an envelope or folder. If unsure of what you can claim, visit ato.gov.au or talk to your accountant.
Get savvy with your super
If you are at a point in life where you have extra disposable income, it may be worth socking more into your super. Talk to your tax advisor or accountant about your individual circumstances and how much extra you’re allowed to contribute. Superannuation is reported after the end of each financial year so keep an eye out for your next statement in coming months to see how your retirement fund is faring.
Make sure you are covered
Insurance may be considered a grudge purchase but it could be the difference between financial ruin and getting back on your feet if the worst happens. Check your home and contents policy to ensure you have enough cover to rebuild and replace your possessions in the event of a total loss. Many home owners make the mistake of just taking out enough building cover to repay their mortgage, but the sum insured should cover the cost of rebuilding your home at today’s prices, including any landscaping and fences. Similarly, contents insurance should be sufficient to cover all of your belongings if you have to buy them again as new. If you have an investment property, make sure you have a specific landlords’ policy to cover claims for loss of rent or tenant damage (see our article about managing unruly renters in this edition of Haven), which are not covered on standard home policies.
The new financial year is an ideal time to review your mortgage, regardless of how long you have been with your lender. It never hurts to look around at other institutions and their loans to ensure your mortgage is still structured to suit your circumstances. Even 0.5 per cent shaved from a $250,000 loan will save more than $23,000 over 25 years.
Talk to your mortgage broker about your financial goals and circumstances for this financial year so they have enough information to help you determine the right loan for your situation.
* Tax information: the information in this article does not constitute advice. As taxation legislation is complex, we recommend you speak with your financial advisor, tax advisor or contact the ATO for further details and expert advice regarding your personal circumstances.
When was the last time you looked closely at your loan, the progress you are making on paying it off and how it compares to others in the market? Analysing your mortgage could mean savings for you, as well as the opportunity to pay it off more quickly, invest in other assets or reach financial freedom sooner.
Make smaller payments, more often
To cut the size of your payments, make more of them. This could even see you pay off your loan faster, and therefore pay less interest overall.
If you pay your mortgage monthly, consider changing to fortnightly repayments. For example, if your mortgage equates to $2400 a month, cut this in half and pay $1200 each fortnight. As well as having more manageable payments to make, by the end of the year you will have paid off $31,200 rather than $28,800.
Pay just a little bit extra
A minimum repayment is just that – for most loans there is no reason you can’t pay more, whether here and there or regularly.
By rounding up to a full number or contributing an extra $100 or even $10, you’ll significantly reduce your mortgage. It may also be worth considering putting all bonuses, tax returns and gifts into your mortgage.
Don’t decrease repayments when interest rates fall
Even if your repayments are lowered when fees and interest rates decrease, it doesn’t mean that’s all you have to pay and, by keeping your repayments at the same level when interest rates are lower, you will pay down more of the principle with each payment and make speedy progress on your loan.
If you can, use an offset account. A mortgage offset account is linked to your loan and the interest payable on the loan from month to month is calculated by deducting what is in your offset account from your current loan. For example, if your mortgage is $500,000 and your offset account has $10,000 in it, you will only pay interest on the remaining $490,000.
An offset account will save interest while still giving you access to your savings. It also means investors can preserve the tax deductibility of the mortgage.
Find a better deal
Ultimately, your mortgage needs to suit you and your circumstances, or you will wind up paying too much. If you think your current loan no longer matches your situation, speak to your finance broker. They will be able to find the right product for you, as well as negotiating appropriate rates on it.
Of course, it is important to make sure that your lender doesn’t charge fees for extra repayments, refinancing, or any other steps you take in an attempt to save on your loan. Your finance broker will be able to provide details and make sure you have a loan that lets you pay down your balance sooner.
If you don’t already have an MFAA Accredited Finance Broker, find one here – they have the expertise to make sure you aren’t paying too much and are in a loan that suits you.
Late payments and loan defaults leave marks on a credit history that can complicate any effort to refinance or secure a loan in the future. Default can also lead to a home being repossessed and sold by the lender, so it’s very important to act quickly to avoid it.
While late bill payments and a loan in arrears can impact your credit report and lead to difficulty securing finance in the future, the worst case scenario is repossession of a property.
In the past, lenders may have taken months to start the proceedings that lead to repossession. However, according to the Financial Rights Legal Centre (FRLC), this is not the case anymore.
“Lenders work to a timetable to begin court proceedings and this can be very difficult to stop once this process has started,” the FRLC explains in its Mortgage Stress Fact Sheet.
Once a mortgagee has defaulted on a loan by failing to make repayments as agreed, they can be sent a Default Notice, which gives them 30 days to catch up on the repayments that are in arrears, as well as continuing to make any repayments that are due in the 30-day period.
“This notice will include an acceleration clause,” the FRLC explains. “This means that if the arrears are still outstanding after the 30 days has lapsed, the entire loan becomes payable.”
Thirty days after the Default Notice, the lender can take vacant possession of a property that is not occupied, or seek a court order for possession of a property that is occupied.
The key to avoiding this substantial trouble is, of course, to keep making repayments. From time to time, circumstances such as unexpected job loss or illness will impact a mortgagee’s ability to make payments and, when this happens, the key is to act quickly, as there are more options before a Default Notice is served than there are after.
“Don’t be scared,” advises the FRLC. “Lenders make repayment arrangements all the time.”
Many lenders will negotiate short-term variations to repayment schedules as long as there is a plan to get back on track, and there are circumstances in which lenders are obligated to agree to such arrangements. It is important, however, not to agree to payment terms that cannot be met.
“Make sure you think through your plan as to when you will resume making payments. Do not promise something you are not certain you can achieve or is not realistic,” warns the FRLC. “If you don’t know when things will improve, ask for an initial arrangement to be reviewed at the end of the agreed repayment arrangement.”
One of the advantages of recognising a looming problem before you get behind in repayments is that a finance broker may be able to assist you to pinpoint the source of the problem, as well as identify savings that may be available by refinancing to a lower-rate or lower-fee loan. Once there are clear signs of financial distress, this will become much more difficult.
If you are struggling to make your mortgage repayments, an MFAA Accredited Finance Broker may be able to help you negotiate with your lender or find a more manageable loan.