Mortgage Debt Management – as important as the asset it funds
The mortgage you are raising to purchase a property may well be with you for as long as the property is held. When purchasing a property, people generally spend considerable time thinking about the location of the property, its features (including its state of repair), and its suitability for which it is being acquired. We suggest that mortgage debt management is as important – and deserves a significant amount of time to develop understanding of the loan; and what ‘the small print’ really means.
A Home Mortgage is the most common form of personal borrowing in Australia:
– Is yours set up in the most suitable manner for your circumstances – both now and for the perceivable future?
– What mortgage debt management tips could you use to optimise the value of your mortgage?
“A mortgage is probably one of the largest and scariest transactions anyone will undertake, yet I am always surprised when clients don’t know or understand what features and benefits their mortgage has – and there are literally hundreds to choose from! Worse yet, they don’t seem to understand that a mortgage is not that easy – or cheap – to move if they are in the wrong product. Getting it right the first time is vitally important. One of the most important considerations in ‘getting it right’ is having a strategic plan around the borrowing (and of course the investment) – what are they trying to achieve? It often surprises borrowers to find out that the mortgage with the lowest interest rate isn’t necessarily going to allow them to reduce debt more quickly than one with a higher rate! Just as they wouldn’t seek medical advice from their trusted mechanic, they shouldn’t seek mortgage advice from their ‘mates at work (or the pub; or at the barbeque)’!” Sonnee Meyers1, Velocity Financial Services Pty Ltd, April 2012 (formerly, Sterling Services Pty Ltd.)
Some mortgage debt management tips –
Following are some of the key points to ensuring the mortgage you are committed to, is best for you:
- Servicability: can the commitments to repayment be met comfortably from your existing financial resources? (A helpful ‘rule of thumb’ is that the monthly commitments should not exceed 30% of your net monthly cash flow.)
- Tenure: most financial institutions will provide home mortgage for terms as long as 30 years – but is this appropriate in your circumstances? The quicker a loan is repaid, the less interest is usually paid (assuming a variable interest facility is in place).
- Adequacy: when undertaking the negotiation for a loan against your home, ensure that the limit applied for is adequate to meet the purposes to which it is to be (or is likely to be) put.
- Flexible Features: Security conditions (how it ties to other assets you hold); Transferability (in case you change properties); Repayment conditions (are you fixing interest; or are you paying Principal & Interest or Interest-only); Offset accounts (minimising the interest paid on the mortgage debt); and ability to make more regular instalment payments (e.g., weekly or fortnightly).
…with these features understood and matched to your goals and needs, like all good STAFF your mortgage will work well for you!
Professional advice for the mortgage debt management process
Whilst it is useful to engage a Mortgage Broker1 when looking to take out/ replace a mortgage, consulting with a financial planner to be part of the process can often result in better outcomes (particularly if there is any likelihood that the mortgage arrangements might ultimately be used for alternative investment purposes), matching your financial needs, goals and objectives with the terms and features of the mortgage product used to fund the present acquisition.
Other wealth management considerations
Once the mortgage is in place –
- Insure your income: Income Protection insurance is very important to ensure that loan servicability can be met during periods of illness resulting in lost income; or during incapacity because of accident;
- Consider other life insurance products that will ensure that mortgage debt management doesn’t become a burden for family if death or permanent incapacity occurs;
- If repaying P&I, make ‘extra’ repayments as frequently as possible;
- Review the repayment structure regularly to ensure interest costs are minimised;
- Exercise care when fixing interest rates (often fixing for too long a term can result in missing out on benefits of rate variations);
- Review your Estate Planning (Wills and Enduring Power of Attorney, at least); and
- When any part of a loan is to be used in a way that the interest cost may be tax deductible, ensure that there is no ‘blending’ between the deductible and the non-deductible portions of the debt.
Mortgage debt management services
Wealth management includes ensuring that debt obligations are as well structured as are the investments they are used to fund. Continuum Financial Planners Pty Ltd offers a broad range of wealth management/ financial planning services and we would be delighted arrange for you to meet with one of our advisers to explore how we might be able to assist you in the development of your financial well-being.
If you or anybody you know is considering a mortgage and would like to discuss these matters with one of our advisers to be given guidance on the key issues above, please call our office (on 07-34213456), or complete the online Contact Us form: you will receive prompt and courteous attention.
1 Sonnee Myers is a mortgage broker with whom we have had a good working association for some years. Her contact details can be obtained from our office.
This article was originally posted in April 2012: it has been occasionally updated/ refreshed, most recently in April 2021.
