GET A GRIP
With interest rates at new lows now is the time to put the squeeze on your mortgage
IT’S time to put the squeeze on your mortgage.
The real estate industry rejoiced this month as the Reserve Bank cut official interest rates to a record low 2.25 per cent. The move is likely to take the typical standard variable rate down to 5.7 per cent, but with discounting it’s possible to sign up to 4.85 per cent — the lowest cost of mortgage debt since July, 1968.
But the banks aren’t just going to do it for you.
Experts say there are ways to get ahead on your mortgage, whether it’s paying down as much of the debt as possible or shopping around for a better deal. Whatever strategy, borrowers can save up to $20,000 over the life of a loan if they play their cards right now.
Choosing not to reset your loan repayments when lenders pass on the rate reduction can pay handsomely.
Finder.com.au money expert Michelle Hutchison said borrowers could save more than $20,000 and shave almost two years off the life of a 30year loan by maintaining their present monthly repayments on an average $300,000 loan.
Financial adviser and mortgage broker Bruce Brammall said many borrowers might already be doing this without realising.
“Because we’ve had a long downward trend for interest rates, people might already be paying considerably more than they need to,” he said.
“The number one thing is if you’re paying the higher rate, keep it going.”
Mr Brammall is a licensed financial adviser and mortgage broker with Bruce Brammall Financial, a Herald Sun columnist and author of the new book, Mortgages Made
Easy, due for release next month.
He said shopping around for a better home loan allowed borrowers to access better discounts on their interest rates, such was the level of competition among the banks. Banks were offering better discounts today than as little as two years ago, he said.
“It’s important to understand that the banks are winning new clients with bigger discounts,” Mr Brammall said.
“A bank will never go to an (existing) mortgage customer and say I’m sorry, you’ve got some big loans with us, (so) we’re going to increase your discount from 0.8 to 1.1 per cent.”
Mr Brammall said the only way existing clients could get these discounts was to switch to another bank, or threaten to leave their existing bank. But it had to be a credible threat.
He advocated using a mortgage broker to help.
Borrowers with multiple loans should also consider using the same lender, as the combined value of several loans could put you into a bracket where banks offered higher discounts. “If you’ve got your home loan and it’s $400,000 you’re going to be a reasonably valued customer,” he said.
“But if you add a $500,000 investment property, you’ve gone to $900,000 and you’ve kicked into a new bracket where banks fight a bit harder and offer bigger discounts.”
Borrowers paying off loans on their home and an investment property could also make savings by using the right repayments strategy.
Mr Brammall said the tip for mortgage holders with both a home loan and investment loan was to concentrate all their spare money on paying down the principal and interest on their home, while switching to interest-only repayments on their investment property.
“As an example, if your home loan has repayments of $2500 a month, principal and interest, and principal and interest on the investment property is $2500, switch it to interest only and it will come down to $2000 a month,” he said.
“You’ll only be paying the interest but the extra $500 you save can be used to pay down your home loan.”
An added bonus to this strategy was that interest payments on investments were tax deductible, Mr Brammall said.
“The reasons for doing that can be that you pay down your non-deductible debt first, while keeping your tax deductions higher because you’re only paying the interest,” he said.
Loan Market chairman Sam White said mortgage holders also needed to factor a rate rise into their thinking.
The key message was to pay off what they could now ahead of an eventual rise in the cash rate predicted in the future, he said.
“While the change is expected to be gradual, it may peak in a couple of years time,” Mr White said.
“The more prepared owners are now, the more time and money they can save on their mortgage in the long run.”