KEY TAKEAWAY: Without a magic ball to look into the future, it's very hard to predict what changes may occur to the financial industry or your personal situation. Considering interest rates are still at a record low, it's a good time to safe proof your home loan so that you're prepared for a possible spike in interest rates or an unforeseeable fall in income.
According to a review conducted by the Reserve Bank of Australia, 1 in 3 Aussies don't have a sufficient buffer on their home loan. But what is a buffer? We'll explain everything you need to know about buffers here to minimise your financial risk.
Home Loan Buffer
Buffers are a security measure taken to soften the impact that financial changes can have on your home loan repayment and make sure you are over-stretching by borrowing an amount you can't afford to repay. These changes could include things like an interest rate rise, suffering from a sudden income reduction, fluctuations in the economy, changing jobs or family circumstances. When applying for a home loan, it is part of your lender's obligation to assess your ability to make the repayments, even if there is a rise in interest rates. Lenders should add an extra 'buffer' onto the current interest rate of the loan to make sure you will be able to meet the repayments even if circumstances change. This is the interest rate buffer. As a borrower you also need to factor in a buffer.
How to safe guard yourself from financial risk
Make additional repayments - While current interest rates remain relatively low, you could re-evaluate your budget and consider making some extra repayments on top of your minimum loan repayment schedule. These could be either one off lump sum repayments or regular extra repayments. This will come in handy if you ever need to take a break from making repayments or suffer from an unexpected change in financial circumstance and need to redraw. In saying this, the terms and conditions for redraw facilities differ significantly between lenders, so it's best to discuss this with your broker to ensure you find a loan product that suits you. On the other hand, if you decide to keep the extra repayments on your loan it would reduce the amount of interest you repay over the term of the loan as well as allow you to pay off the loan quicker.
Refinance your loan - To take advantage of low interest rates you may be able to refinance your mortgage. Speak to one of our brokers about current products available.
Get Mortgage Protection Insurance - For some extra security you could take out Mortgage Protection Insurance. In the unfortunate case that you fall ill or become unemployed, Mortgage Protection Insurance will ensure your home loan repayments will be covered.
Thinking it’s time to refinance to include a buffer in your home loan? Speak to a broker today.
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Disclaimer: The information provided in this article is not legal or financial advice. It has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information, you should consider the appropriateness of the recommendations, having regard to your own objectives, financial situation and needs. We encourage you to consult a finance professional before acting on any suggestions provided in this article or on this website.