Securing a mortgage is usually the most significant financial commitment you’ll ever make, and it sticks with us for 30 odd years if we let it! From early adulthood when we’re just starting to build our careers, to the midlife years when we might be considering a bigger family home, and finally to retirement when the majority of our mortgage is paid off and our housing needs change once again. In this article, we’ll talk you through how to structure your mortgage during the different stages of your life and the pros and cons of each of these structures as well as common pitfalls to avoid at each stage.
Bear in mind that there are various ways you can structure your mortgage and a one size fits all strategy isn’t the best approach – the best mortgage structures are tailored specifically to you and your financial situation. If you feel as though you’d like more guidance on whether a structure is right for you, you can book in a free 15-minute mortgage chat with us and we can talk over your options. With that out of the way, let’s get into the article!
Early Adulthood – Just Starting Out
Let’s say you’ve freshly bought your first home or are about to buy your first home and are wondering how to structure you mortgage. Your career and income are currently in a growth phase but it’s in the early stages.
Recommended structure: A fixed-rate mortgage over a 30-year period
Pros:
- This structure allows you to comfortably cover your monthly payments while leaving room for other essential expenses and savings.
- A fixed-rate mortgage provides stability during the initial years of your career when income might not be as predictable.
- Opting for a longer loan term lowers your monthly payments.
Cons:
- You’ll be paying more in interest over the long run
- A common pitfall during this phase is not having enough of a deposit and taking on too big of a mortgage to begin with. This can hinder your finances for years; particularly if your situation were to suddenly change or the economy goes south and you have to spend a lot more on interest repayments.
Late Adulthood – Starting a family and career stability
During late adulthood your career is more established, and your family might be starting to get a bit bigger, you’ve now got some equity in your current property and you may be wanting to put that towards moving into your next home or renovating your current property. Paying down your mortgage also becomes more of a priority as you now have more disposable income to put towards your 30-year term.
Recommended structure: Having some of your loan on a revolving credit
As opposed to just topping up your mortgage to buy your next home or complete renovations on your current property, a revolving credit is like having a really large overdraft. The interest you pay is calculated daily based on the balance of your account. So the more money you have in the account the less interest you pay. You can make lump-sum repayments if you wish and redraw money up to the loan amount limit.
Pros:
- You can put all of your savings into your revolving credit which offsets the amount of interest you have to pay on it
- You can pay off your mortgage faster and in lump sums
- There are no fixed repayments, which can be good if your income fluctuates.
- Some lenders can reduce your credit limit each month, which can help you pay off your loan within a specific term.
Cons:
- You need to have self-control and avoid the temptation to spend up to the credit limit – as this will keep you in debt for longer.
- Application fees can be up to $500 and you may also be charged fees for day-to-day transactions.
- A common pitfall here is renovation blowouts, or buying a bigger home and having a bigger mortgage that can put your mortgage on the back foot. It can be incredibly easy and tempting to continue to top up your mortgage, but much harder to pay back later on.
Midlife – More financial freedom
During midlife, your kids may be getting older or getting at the stage where they’re moving out, your career is in a good place as is your equity, and you may have more income at your disposal and are thinking of paying off your mortgage earlier and purchasing an investment property.
Recommended structure: Having an offset account for your mortgage
In an offset loan, the lender takes into account any savings or funds you may have in other accounts and deducts this from the loan total before calculating your interest.
Pros:
- Paying less interest means you can pay off your loan faster.
- You have flexibility as there is usually no fixed term.
- It is often possible to link many different accounts (partners etc) to generate more savings on interest.
Cons:
- Any savings that are offset will no longer earn interest. (However, interest earned on savings is usually much lower than the interest paid on debt, so the offset will likely be worthwhile).
- A common pitfall here that we generally see are people on a great income but they’re spending it on the wrong things; aka keeping up with the Jones’. Their money could be more productive like go towards paying off their mortgage faster or buying an investment property.
Retirement: Downsizing and Financial Stability
Entering retirement brings about significant changes in lifestyle and financial goals. You are about to pay off your mortgage and you may be thinking about downsizing.
Recommended structure: A floating rate mortgage
If you’re wanting to pay down your mortgage as aggressively as possible, you may want to try a floating rate home loan as this will allow you to make additional payments to your mortgage without any penalties.
Pros:
- You can make additional payments without any penalties.
- You have the flexibility to move to a fixed-term loan as you please.
- You can more easily absorb more expensive debt into your floating home loan.
Cons:
- Floating rates are usually higher than fixed rates.
- When rates go up so do your payments, which can put pressure on your cashflow.
- The common pitfall may be quite obvious here; it’s having a decent mortgage when you’re set to retire. Through countless top ups, lack of investments/assets and bad spending habits, your mortgage can really rack up, forcing you to work well beyond your retirement years.
Structuring a mortgage tailored to the different stages of your life requires careful consideration of your financial situation, goals, and lifestyle. Whatever stage of life you’re in, it’s crucial to align your mortgage strategy with your overall financial plan to ensure a secure financial future for you and your family.
If you feel as though you’d like more guidance on whether a structure is right for you, you can book in a free 15-minute mortgage chat with us and we can talk over your options to ensure your mortgage strategy is right for you.
Keep in mind this article is providing general information and not individual financial advice.
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