Building a mortgage buffer zone

housesAs a borrower, there will be times when things and circumstances change, and you will want to prepare for this.

This minimises the impact of risks that we all encounter in life.

The best way to manage this is to build a financial buffer zone for yourself.

A recent Commonwealth Bank research study1 of over 1,000 Aussie homeowners revealed more than half (58%) were concerned about their ability to manage their home loan if their financial circumstances were to change.

These changes included fluctuations in the property market, changes to repayment amounts, or unexpected life moments.  Building a buffer into your mortgage can give you that extra peace of mind, and help you ride out those financial road bumps ahead.

Here are a few tips on how some borrowers have built a financial buffer into their home loans.


Make extra repayments into your home loan

One of the best ways of getting prepared for all types of changes is to make extra repayments into your mortgage now.  Getting ahead of your repayments will give you that extra buffer for when times are tight.

If you have a variable rate loan, you may make extra, regular, or additional lump sum repayments into your mortgage.

Alternatively, you can increase your regular monthly repayments above the minimum amount.  One of the most effective ways of doing this is to make halve your monthly payment amount, and pay this amount on a fortnightly basis.

Making extra repayments can cut your loan by years and can save you thousands. It is really worth looking into.

You can check out ASIC’s MoneySmart mortgage calculator to work out how much you can save.


Prepare for interest rate changes

Interest rates are currently at their lowest for a long time.  However, you should prepare for the time when these rates move upwards.  One way to help prepare is to start putting a buffer in place.

According to the CBA, some of the clients they surveyed protected themselves by making the same repayments to their mortgages even after interest rates dropped.

Another group of clients said that they regularly put extra funds into their offset account, which reduced the amount of interest they had to pay.  Having the extra funds in the offset account still allowed them access to funds when they needed it.

You could also fix the interest rate on your mortgage, whilst rates are at record lows.  Having a fixed rate mortgage will protect you against interest rate changes, as well as giving you certainty over your mortgage repayment amounts.

Some of our clients have also elected to hedge their bets each way, by only fixing a portion of their mortgages, whilst keeping the other portion variable, just so they can keep making additional repayments on that variable portion.


Flexibility in your mortgage

Depending on the type of mortgage that you have, there may be features and options that are incorporated into your home loan, which can give you access to funds and help you adapt to your changing circumstances.

For instance, most mortgages have a redraw facility, and some lenders will allow borrowers to convert their loans to an interest only facility for a short time, until cash flow improves.

These features form part of the arsenal of tools that can give you some flexibility in your mortgage, and help manage your borrowing risks more effectively.

Speak to us if you want to find out more on how you can construct a financial buffer, to help ride out some costly, unexpected future event.


1. The study was conducted by Commonwealth Bank in 2014, amongst 1,028 Australian homeowners aged 18 years or older, who have purchased a property within the previous 5 years. Fieldwork commenced on Thursday 16 October and was completed on Monday 20 October 2014. After interviewing, data was weighted to the latest population estimates sourced from the Australian Bureau of Statistics.

Important notes:

The results shown in this article are for guidance only and may not reflect the actual amount payable by, or the tax details applicable, to a client.  This article is an information service only without taking into account the investment objectives, financial situation or particular needs of any particular person or party.  No account has been taken of the rise and fall of interest rates, exit penalties, fees, or other investment strategies.

This article may not take into account changes to a client’s current circumstances in the future or the impact of specific future events.  The article is not, nor can it be interpreted in any way as, a detailed financial plan tailored to the client’s individual requirements, but is of general application only with the result that information/assumptions in it may change pending completion of a detailed financial plan.

The author does not accept any responsibility for the manner in which the article are used by the reader.  Reliance should not be placed by anyone on this article as the basis for making any financial, investment or other decision.

You should not make an investment decision based on this article.  You must obtain professional advice on any investment decisions or outputs from this article to determine whether they are appropriate for your particular needs, investment or borrowing objectives and financial situation.