What is a Mortgage buffer and how will it benefit me

A mortgage buffer is a bit of jargon for having an available limit on your mortgage(s) that you can access/redraw for emergencies or other needs such as a car, home improvements etc.

There are different ways to build one up if you don’t have one at the start of your mortgage when you buy a house. If you are buying with a low deposit (ie less than 20%) it can be a little harder starting with one as most of your cash is going into the purchase and incidental costs. Sometimes borrowers have access to available limits on their home loans without even realising it. Some banks have loan products that make it easier to build up a buffer of available loan limit than others.

In simple terms, building up a mortgage buffer or access to funds in future, starts by paying more than the minimum mortgage payment. For example, if the minimum mortgage payments are based on a 30-year term, and that’s how your loan is documented at the start, and you make payments based on say a 25-year term, you will pay off more principal. This means the loan balance drops faster than the loan limit, creating a ‘buffer’ or available limit that you can potentially access or draw down on in future.

Many bank loan products allow you to access the money/principal that you have paid down quicker, usually at rate review time. Paying more than the minimum is like a passive way of paying down the mortgage quicker but still being able access it in emergencies or other pressing needs.  

Here is a more specific example, just using approximate numbers so you get a feel for how it works:

$200,000 on say 6% interest, 30-year term is approx. $554 a fortnight in payments. In 5 years time the loan limit and balance is around $186,000. However, if you set payments at the start based on a 25-year term, being around $595 a fortnight, the balance in 5 years time is around $180,000, the loan limit $186,000. So, you will have built up a buffer of approximately $6,000. Obviously, you don’t want to tap into that mortgage buffer unless you really must.

Some borrowers, instead of increasing payments on the fixed loan, will separate off a portion of their mortgage loan on a floating/revolving credit/offset facility. And pay that extra payment portion into a separate redraw facility.

Part of any mortgage strategy is still having access to the extra you have paid off at an accelerated rate. This does however require discipline as you don’t want to squander hard earned gains!  

Everyone’s situation is different so reach out to your Craig Pope Financial mortgage adviser to check your current situation.