Making the most of a bad situation

While many home owners are under a financial dark cloud having lost, or partially lost, their income during the health crisis, others that are still in work are taking advantage of a financial windfall.

Free childcare, less socialising and the monetary benefits of working from home have freed up, in some cases, hundreds of dollars per week in spare cash, which clever home owners are using to get ahead on their mortgages.


Childcare, petrol and socialising savings net $6000 in 8 just weeks

Expenditure obviously varies from household to household but in terms of savings opportunities brought on by COVID-19, childcare, petrol and going out costs are three key areas, according to Peter Campbell, certified financial planner and senior financial advisor of West Australian-based Merideon Wealth Strategies.

Based on these three savings areas alone, Mr Campbell said a typical Perth family with two working parents and two children in full time childcare is looking at savings of about $6,120 over the past eight weeks alone.

“Childcare is the biggest savings area for that family,” he said. “It’s about $700 a week that has been saved, so straight off the top there’s $5600 saved immediately on childcare alone.

“Looking outside of that, the cost of fuel is a really big one because we’re not driving as much as we used to. The average cost for a two-car household is about $70 a week, maybe a little bit cheaper at the moment with lower fuel prices, but even if we’re just halving that cost that’s $280 saved over the last eight weeks.

“And if we allow for a bit of a coffee habit in there as well, so $6 a day, that’s a good $240 saved there. So just across those three areas for that typical family, it’s just over $6000 saved, which is substantial. Then the question becomes, ‘what do we do with those savings?’”

Home owners are paying down their mortgage with the savings

Amid all the uncertainty in the world right now, one place Australians can look for stability is their own financial house, Mr Campbell said.

“If you’re able to make good decisions amidst the craziness, you will be setting yourself up to excel in the good times,” he explained.

Windsor house

Some home owners are taking advantage of financial gains brought on by COVID-19 to pay down their mortgages. Picture:

Sydney-based radio newsreader, Emily O’Brien, is doing just that. The mother-of-two said before the Federal Government announced a period of free childcare during the health crisis, she and her fiancee had been “scraping it together” to make their mortgage repayments and pay other bills.

“Paycheck-to-paycheck is how I would describe it, and not much room for any extra money to be put aside into savings for a holiday or our wedding coming up,” Ms O’Brien said. “But when the free childcare announcement was made, it sounds silly but I almost started crying because it was such a huge shock and a huge relief.

“We pay between $630 and $650 a week for childcare so it’s a huge bonus for us. I said to myself right from the start, I need to put a plan in place to put that money aside, so I set up an automatic transfer from my bank account and I’ve been paying $500 extra into our home loan each week and saving the rest.

“Over the three months of free childcare we will have paid an extra $6000 off our home loan.”

Ms O’Brien added, topping up her mortgage wasn’t an easy decision at first admitting she and her partner spent some of the childcare savings in the first couple of weeks of lockdown.

“We went and bought a lot of second-hand gym equipment for our garage, which cost about $500,” she said. “But apart from that, I think we have been pretty disciplined.”

The current record-low interest rate presents a huge opportunity for “smart” mortgage holders on a stable income to make additional repayments on their mortgage, said Sam Boer, chief executive officer – Smartline Personal Mortgage Advisors.

“It makes sense to do this if you can, as the quicker you pay down your principal, the less you will have to pay over the term of your loan,” Mr Boer said. “If you are not paying down your mortgage in this low-rate environment, it’s a missed opportunity as rates won’t stay low forever.

“Those home owners who have taken the opportunity to pay down their mortgage by making additional repayments will find down the track they have lower mortgage repayments. This gives you greater cash flow and can help you pay down your mortgage even more quickly, making a big difference to the total amount you owe on your loan.”

He added, there are some great deals on fixed-rate loans at the moment where if mortgage holders take out a three or five year fixed loan now, they will be locking in substantial savings.

“Once the economy starts to come back, we should start to see wages improve and interest rates rise. If you are still locked into your low rate at this point, you should start to see significant improvements in your financial position,” Mr Boer said.

Renters are realising their dreams of owning a home

For first-home buyers and renters with a stable income, the financial gains as a result of COVID-19 present a great opportunity to save for a deposit, Mr Boer suggested.

“[For first-home buyers] a bigger deposit will increase your borrowing power so you won’t need to borrow as much,” he said. “This may mean you don’t have to pay for Lenders Mortgage Insurance and your repayments will be lower. Alternatively, a bigger deposit could help you borrow more if that is what you want to do.”

Carlton house

Renters are feeling more optimistic about their ability to save for a deposit during COVID-19. Picture:

Melbourne nurse, Scott Shields, who rents a two-bedroom apartment, said saving for a deposit on a home has always seemed too difficult, but with savings of between $300 and $500 a week during COVID-19 restrictions, he feels more optimistic.

“I was feeling like it wasn’t going to be something that was easy or possible in the foreseeable future, but obviously saving cash from not going out, now I know that I can save so that’s given me a little bit more motivation to keep going with it,” Mr Shields said.

“With the amount of money I’m saving now I can see, in the next year or two, having enough money to put down for a deposit.

Some expenses are creeping up during COVID-19

But while some Australians might be making big savings during this period of COVID-19 restrictions, other small expenses are adding up and eating into their surpluses, warned Mr Campbell.

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“Nothing is free in this world so we need to be really aware of what we’re spending money on,” he said. “In terms of costs increasing, I think discretionary spending is a big one, so splashing cash on deliveries, either buying stuff on websites like Amazon or even the delivery of restaurant food.

“Also cooking at home as we’re not able to go out as much as we used to meet friends. I’m finding that people are spending more on stocking the pantry with good quality stuff.

Online shopping

Online shopping has increased during COVID-19. Picture: Getty.

“Impulse buys are up a fair bit at the moment, especially for those people that are at home and bored, the retail therapy is kicking in.”

People tend to become very defensive with their expenditure during a crisis, which can see them turn towards credit facilities to try and prop themselves up rather than focusing on their financial behaviours for the long-term, Mr Campbell explained.

“Financial behaviour is not something that is front of mind for us naturally,” he said. “One thing that I tend to ask people when looking at those types of expenditures is, ‘would you have made that purchase three months ago or is it just something to make you feel good right now?’”

For those looking to apply for a home loan, Mr Boer warned the banks are being especially prudent in their serviceability assessments during the pandemic and prospective borrowers should make sure they get their finances in good order before they apply for a loan.

“High discretionary spending and debt are not highly regarded by banks,” Mr Boer said. “Ideally then, you should get rid of your credit cards, or if you have to have one, make sure you always pay it off on time.

“You should also be very careful of using buy now pay later services as banks are wary about these. They can indicate that the borrower has problems saving or spending above their means, so be prepared for higher scrutiny of your expenses.”

How savings habits could change post COVID-19

Ms O’Brien said her eldest son starts school next year so she will only have to pay full-time childcare costs for her youngest child. However, she said she plans on putting the money she would have previously been spending on childcare into her home loan.

“Whatever we’re saving on his childcare, I’ll just pretend I’m still paying that and put that into the mortgage to keep the ball rolling a little bit in terms of paying off the mortgage a little bit quicker,” she said.

Mr Shields asserted he “definitely won’t go back to pre-COVID socialising” saying he’ll still go out for a drink here and there but that COVID-19 has taught him a lesson in saving he won’t be forgetting soon.

The health crisis has prompted a real formative period for Australians in terms of how they manage their finances, said Mr Campbell.

“I think that people are looking at their finances more than ever,” he said. “I think people are going to be more in tune with what they’re doing with their money, what their debt is actually costing them and their expenses. They will probably have a new appreciation for their income, especially when they’re seeing so many people around them going without.

“For younger generations, this is the first crisis that they’ve gone through. This is a bit of a check for what can and will happen throughout our lifetimes so it’s important that we make sure that our finances are structured in a way that we can actually weather those storms as they come.”

This commentary is general in nature and does not take into consideration the specific needs of any readers

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