As we approach the conclusion of 2023, numerous homeowners find themselves contending with escalating interest rates, a scenario that’s become the current standard. For many, navigating home financing in such circumstances is uncharted territory. Consequently, you might find yourself uncertain about how to navigate this new reality.
Presented below are four essential guidelines to aid you in adjusting your finances to accommodate the prevalent trend of rising borrowing expenses while maintaining the affordability of your homeownership.
Tip No.1 Opt for Partial Principal Repayment Were you aware that your monthly mortgage payment comprises two essential parts? One portion is the principal, and the other is the interest.
The interest component represents the interest charged by the bank when you secured the loan. It’s calculated by applying the monthly interest rate to your loan and then multiplying it by the remaining principal amount owed to the bank for that month, a process known as loan amortization.
If you wish to decrease your monthly repayment, consider making a partial repayment towards the principal. A partial repayment involves paying off a portion of the total principal owed to the bank. This action decreases the outstanding principal, leading to reduced interest charges on your loan.
Let’s clarify this with a straightforward example. Imagine owing a friend $100,000, and they add 1% of your debt as interest at the end of each month. At the end of the next month, you would owe them $101,000.
Now, suppose you unexpectedly obtained a windfall and told your friend that you would pay off half of your debt, which is $50,000. Consequently, at the end of each month, they would only charge you $500 in interest (instead of $1,000) on the remaining amount you owe. This ultimately results in lower monthly payments, enabling you to gradually settle what you owe to your friend.
Tip No. 2 Utilize Rental Earnings
In the face of mounting financial pressure due to escalating interest rates on your bank loan, the obvious remedy is to boost your earnings. However, accomplishing this is easier said than done, particularly with the constant specter of a recession. Many of us are merely hoping to retain our jobs, let alone expect a substantial pay increase.
Fortunately, for homeowners, there exists an alternative revenue stream you can tap into: Rental income. If you have an extra room in your residence, why not consider renting it out? Renting out a spare room has the potential to generate passive income ranging from $800 to $1,000 every month. Even as the monthly mortgage repayment grows more expensive, this additional income can cover a significant portion, approximately 30-50%, providing you with extra disposable income.
Tip No. 3 Extend the Duration of Your Bank Loan
Not all of us have a substantial sum of money readily available for a partial principal repayment. If this situation resonates with you, don’t worry. There are still viable approaches to reduce your monthly mortgage payment.
To begin, you can elongate the tenure of your bank loan. The rationale behind this is straightforward. Let’s consider a scenario where you owe a friend $100,000, and they’ve stipulated a repayment period of 10 months, resulting in a monthly payment of $10,000. However, if you propose repaying the same amount over 50 months, the monthly repayment diminishes to $2,000.
Of course, there are certain drawbacks to this strategy. The bank, unlike a friend, operates on a different set of terms. If you opt to extend the tenure of your bank loan, they will persist in applying interest for as long as the loan remains outstanding. Prolonging the duration of your bank loan leads to continued interest accrual. The more you stretch out the repayment period, the greater the sum you ultimately pay in interest.
