For most homeowners with mortgages, income comes in at regular intervals and mortgage payments go out regularly - typically fortnightly or monthly. As long as more goes in than comes out, very little monitoring of your mortgage is required.
For most homeowners with mortgages, income comes in at regular intervals and mortgage payments go out regularly - typically fortnightly or monthly. As long as more goes in than comes out, very little monitoring of your mortgage is required.
When your income fluctuates, for example; bach rental accommodation, it can be a good idea to adjust how you structure your mortgage so you don’t miss a regular mortgage payment.
Imagine your mortgage payments for your bach rental accommodation are $1,500 per month. In winter you might earn $1,000 per month in rent however in summer you might earn $3,000 per month.
How can you best use this money without checking on your bank account every month and transferring money for any shortfall?
The first thing you’ll need is a buffer. If you only have $1,000 available in your account and $1,500 is paid out, you may have to pay additional bank fees. The bank will also likely call you to make sure everything is ok.
If it’s the first time there has been a shortfall, they’ll be reasonably polite and helpful. We would suggest your buffer is at least your expected shortfall through the slower months.
In the example above this might be $3,000 - $4,000. While the bank will be polite, they will have a record of your missed payment which may affect getting a mortgage for additional properties or top-ups in the future.
The second thing to look at is how you can best use the income and the buffer you’ve set up. Putting your money into a standard transactional bank account is fine however earns very negligible interest, if any, these days.
One solution is to make use of a revolving credit account.
Revolving credit accounts are an account that allows you to pay money into your mortgage (thereby reducing how much you owe) but also allows you to withdraw the money, just like a normal transactional account.
In fact, it’s helpful to think of revolving credit accounts in the same way as a standard overdraft, except instead of the normal 10%-20% p.a. interest rate, they are 3%-4% because they are part of your mortgage.
So a mortgage totaling $720,000 might have $700,000 fixed for various terms (1-5 years) and a $20,000 revolving credit. With a buffer of $4,000 in the account, interest would only be paid on $716,000, and on the day that your summer rental of $3,000 is paid in, interest would be paid on $713,000.
The outcome of this mortgage structure is the potential to save hundreds of dollars of interest per year and only need to monitor your mortgage account every few months to make sure you’re tracking along nicely.
This article was produced by The Mortgage Lab and is not intended as personalised financial advice. To discuss your particular situation, talk to your local adviser. All numbers are meant as examples and not indicative of any property in particular. Talk to Bachcare for forecasts in your area.
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