5 tips for every parent paying off a mortgage
1. Use your home to invest for you children. I meet a lot of parents who want to save money for their kids. It might be for their education or just to give them a head start in life once the reach adulthood. what I see most often is this money being paid into a savings account. Apart from only earning a low amount of interest there’s also tax that has to be paid. So that 3% you might be earning ends up only being 2% at best. Unfortunately, it gets worse. Because of inflation, the money won’t be able to buy as much in a years time as it can today. As the Rba aims to keep inflation around 2 - 2.5% this means the BUYING power of that money either staying the same or going backwards! If that money goes into a home loan at 3.34% (the lowest rate I currently have available) then it’s saving more interest than a savings account will pay AND there’s no tax to pay on reducing debt. You can end up in a much better financial position to help your kids in the future.
2. Think about refinancing to release some equity as soon as you think about trying for kids. Normally, I’m not a big fan of people releasing too much equity. Years of bank marketing has made people focus on how much they can borrow instead of how much they can pay off. Getting ready for kids though is a different story. There’s so many reasons you might need access to additional funds through pregnancy and when there’s a little one around. It’s also the time where it’s harder to get lending from banks. Planning ahead means you can have the money sitting there available in case anything unexpected comes up. Just make sure you don’t give in to the temptation to buy a jet ski when you see extra money in your account.
3. Check your life insurance. A lot of people don’t think about their insurances too often. When you take out new debt (or pay a substantial amount off) you should review the cover you have to make sure it’s the right amount. Too little could mean your family being caught out if something was to happen to you. Too much and you’re giving money to an insurer that could be going to improving your long term financial situation. It’s often the best idea to pay for life insurance through superannuation as it’s less of a burden on your cash flow and there can be tax advantages.
4. Make do with slightly less. I get it, we’re proud of our homes and want them to look and feel nice. So often though people get caught out with the idea that they have to constantly update and improve everything in the house. A lot of the time it’s justified with ‘interest free periods’ or ‘it’s on sale’. Remember, while you have a home loan EVERYTHING you buy is on finance. Because money going elsewhere is money that isn’t paying down the loan.
5. Watch what you eat - I know, this isn’t your usual financial advice but hear me out. It’s been reported that households throw out on average $3,800 a year, get $2,000 worth of home delivery and spend $5,200 eating out on average. Let’s say you keep eating out (you need to have a life) but it’s less often at nicer places. You spend $4,000. Then, through better meal planning (because if $3,800 is being thrown out there’s probably not much planning going on) let’s say the extra food costs at home are $1,000. That leaves you $4,000 a year extra to put on the mortgage. The result? 7 years off a $500,000 mortgage and $77,643 saved (compared to a $500,000 mortgage over 30 years at 3.34%). You’ll save even more if your interest rate is higher than that.