We're a few months into the new year and many of us may have already fallen off our new year resolution bandwagons. The good news is that if any of yours involved getting your finances in order for 2020, there's a way to get back on track. Here are five changes you could make to your finances in 2020 that may save you thousands.
1. Refinance your home loan
With home loan rates at record lows following three Reserve Bank of Australia led cash rate cuts in 2019, there’s never been a better time to consider refinancing your home loan.
For example, if you have 25 years left on your $500,000 home loan and are paying the average rate of 3.74 per cent, you could save $277 a month and $3,324 a year by switching to the lowest rate on the market, 2.69%.
Savings when refinancing from average to lowest variable rate – owner-occupier (P&I)
|Loan size||Average rate||Lowest rate||Monthly savings||Annual savings|
Note: Figures based on average versus lowest variable rates for owner-occupiers paying principal & interest on a loan and refinancing 5 years in to a 30-year loan. Figures do not include fees. Data accurate as at 24.02.2020.
If you do decide to refinance your home loan, there are a range of options that have rates starting with a 2. There are also a range of home loans that charge $0 annual fee and even waive upfront fees if you do refinance.
Your current lender may be offering lower rates to new customers to get them on their books. This is where comparing your options and doing research can be very helpful. If you can arm yourself with the rates being offered to new lenders you can call up your lender and ask to have this rate matched. You never know, you might be one phone call away from a lower rate.
Keep in mind that there are generally some costs associated with refinancing your mortgage, including upfront fees. Do your research and read the Product Disclosure Statement of your new product before you refinance.
2. Ditch the little luxuries and pay down your debt
Would a ‘fix your finances’ list be complete without someone telling you to make lunches at home or skip a second coffee?
Instead of throwing those savings into a savings account, this year you may want to consider putting them into your mortgage. You might save thousands on mortgage repayments and shave years off your loan.
For many Australians, paying down your household debt is a priority. According to the Grattan Institute, the national average for all outstanding principal mortgages (excluding investment loans) is $280,912, and the average mortgage debt for Sydneysiders is 30 per cent higher, at $365,873.
Much like home loan rates, savings accounts are also at record lows. If you’re prioritising paying off your home loan debt, the savings you could get from putting your spare change into your home loan may be more beneficial than if you put them into your savings account.
For example, if you’re buying two coffees a day at $3.50 each, in a year that second coffee would cost you $1,274. If you had a had a $400,000 mortgage for 30 years and started adding these savings to it as extra repayments, you could save $28,574 in interest repayments over the life of your loan, and would potentially also shave 2.8 years off your loan term.
Ditching life’s luxuries and making extra mortgage repayments
|Luxury||Frequency||Cost per purchase||Cost per year||Mortgage interest savings||Time saved on mortgage|
|Bottle of wine||x1 per week||
|Subscription TV||1x per month||
|Coffee||x7 per week||
|Buying lunch||x5 per week||
Notes: Figures based on a 30-year $400k home loan at avg. owner-occupier P&I rate of 3.74%. Assumes extra repayments begin immediately into loan. Data accurate as at 24.02.2020.
As long as your home loan allows for extra repayments, paying down your debt by ditching one or more costly habit could help you reach financial freedom sooner.
3. Switch and save on credit cards
If you’re a big fan of the plastic, another way you may be able to fix your finances in 2020 is by switching to a lower rate credit card with no ongoing fees.
The average credit card interest rate on the RateCity database is 16.68 per cent, while the annual fee is $136.63. In fact, over the 12 months leading to January 2020, the average annual fee has risen by almost $10.
What does this mean for you? The latest Reserve Bank of Australia statistics show the average debt accruing interest per credit card account is $1,968. If you made minimum repayments on this amount at the average interest rate of 16.68%, it would take 16 years, and cost $2,892 in interest, to pay off this debt.
However, if you switched to ING’s Orange One credit card, for example, you’d pay 11.99 per cent in interest and $0 in annual fees.
If you now made minimum repayments (2 per cent) on that same balance of $1,968, you’d shave four years and $1,533 in interest off the debt.
Credit card minimum repayments on $1,968 balance
|Credit card||Interest rate||Time taken to pay off balance||Total cost including interest|
|Average standard credit card||16.68%||16 years||$4,797|
|ING Orange One credit card||11.99%||11 years 4 months||$3,308|
|Difference||4.69%||4 years 8 months||$1,489|
Source: RBA Credit and Charge Card data for December 2019. RateCity.com.au.
Note: Figures do not factor in fees. Data accurate as at 24.02.2020.
This is why it is crucial you routinely compare credit cards to see if there are more affordable options out there. This also highlights the importance of making more than the minimum repayments on outstanding balances.
4. Look for lesser-known brands
It’s not just home loans and credit cards that can use a refresh this year.
Another option to cut down on bills and get on top of your finances is to switch from big brands to lesser-known companies.
Take a phone plan, for example. Imagine you own your phone outright and are looking for a plan with at least 15GB of data per month, unlimited calls and texts and access to 4G networks.
To meet these requirements, Telstra’s Small plan comes in at $50 per month. A lesser-known provider like Amaysim, however, offers all of this and 30 GB of data for $30 per 28 days.
Differences between phone plans
|Phone plan||Data||Calls||Texts||Monthly price|
|Amaysim Unimited||30GB||Unlimited||Unlimited||$30 (per 28 days)|
Note: Data accurate as at 24.02.2020.
Keep in mind that bigger brand names like Telstra can also act as a lifeline for rural communities as its coverage is typically more extensive. Do your research around whether switching any products is right for your specific needs.
5. Boost Your Credit Score
It’s no secret that having a higher credit score means banks are more likely to approve your application for financial products. But it can also mean a bank is more likely to offer you a lower interest rate on said products.
Whether you’re looking at a home loan, personal loan or credit card, having a higher credit score makes sure you’re seen as a more reliable customer. And the lower your rates the less interest you’ll pay, and the better your finances will be in 2020 and beyond.
Luckily, comprehensive credit reporting means that banks are now reporting on your positive information, not just your defaults.
Here are a few steps you can follow to add positive information to your credit history and potentially increase your credit score:
- Pay down your debt. Budgeting to pay down any outstanding debt you have, such as credit card bills, shows financial responsibility. If you have multiple sources of debt, such as a car loan and a credit card, it’s recommended you begin with the debt with the highest interest rate first.
- Pay your bills and do so on time. You can easily set up direct debits with your bank for specific dates to ensure you never forget a bill again. Also factor in unexpected bills or higher costs into your budget, such as higher energy bills in winter etc.
- Check your credit history for mistakes. You’d be shocked at how often mistakes can occur from family members or people with similar names having their history applied to your credit file.
By making the switch to more affordable products or working on your credit score you could kick some serious financial goals in 2020.
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