Shop­ping around for the best mort­gage deals

With new gov­ern­ment rules af­fect­ing bor­row­ers, it pays to scout around for a bet­ter deal

Monthly Chronicle - - Business & Personal Finance - Mark Plaskitt from MLC Ad­vice Pen­nant Hills has been work­ing in Fi­nan­cial Plan­ning and Mort­gage Broking since 2004, help­ing clients man­age their home loans, and in­vest­ment debts. MARK PLASKITT

Lately most mort­gage­hold­ers have been get­ting letters from their banks say­ing that their in­ter­est rates are chang­ing - usu­ally go­ing up - even though the RBA hasn’t moved of­fi­cial rates. So what’s go­ing on?

This year the bank­ing reg­u­la­tor has placed ex­tra re­stric­tions on banks to try to slow lend­ing to in­vestors, hop­ing to take some heat out of prop­erty mar­kets, es­pe­cially in Syd­ney and Mel­bourne. And it has worked – to some ex­tent any­way. Most banks are now charg­ing higher in­ter­est on in­vest­ment-prop­erty loans than owner-oc­cu­pied loans, and more for in­ter­est-only loans (favoured by in­vestors) than prin­ci­pal and in­ter­est loans.

So an in­vestor who’s on in­tere­stonly has likely been hit twice and is ef­fec­tively pay­ing sur­charges for be­ing an in­vestor. Clients are ask­ing what they can do, and our first an­swer is gen­er­ally to shop around! We’ve helped some clients find a bet­ter deal which even af­ter the re­cent in­creases may be equal to or even lower than what they were pre­vi­ously pay­ing. Banks fa­mously tend not to of­fer their best rates to cus­tomers un­less the cus­tomer threat­ens to move to a com­peti­tor, so if you haven’t gone look­ing for a bet­ter deal, there’s a strong chance you may be pay­ing your bank more than you may need to.

One op­tion is to change from in­ter­est- only to prin­ci­pal and in­ter­est – this avoids one of those sur­charges. How­ever it can re­sult in you pay­ing more ev­ery month, be­cause you would then be pay­ing off part of what you owe, as well as in­ter­est, so it will af­fect your monthly cash flow.

The up­side is it will save you lots of in­ter­est in the long-run and pay off your debt much sooner. An­other op­tion is to fix your rate for a pe­riod of time, which gives you some cer­tainty of cash flow, but can also make it harder for you to rene­go­ti­ate with your bank in the fu­ture and re­strict you from mov­ing the loan prior to the end of the fixed term with­out a size­able penalty.

Many of our clients have more than one loan, so it’s im­por­tant to get the over­all strat­egy right. Debt falls into two cat­e­gories - ei­ther good debt or bad debt. Good debt means bor­row­ing for an in­come-pro­duc­ing in­vest­ment like an in­vest­ment prop­erty or shares, the ‘good’ re­fer­ring to the fact that the in­ter­est should be tax-de­ductible, plus the as­set pro­vides you with in­come through rent or div­i­dends, and even­tu­ally a cap­i­tal gains. ‘Bad’ debts in­clude home loans, credit card debt, per­sonal loans – all which are not tax-de­ductible, don’t pro­vide in­come, and don’t lead to cap­i­tal gains un­less you sell it.

Many client’s first pri­or­ity is their home loan, so we usu­ally pre­fer to see this be on prin­ci­pal and in­ter­est as we like it to be paid off as quickly as pos­si­ble. Pay­ing your home loan off early can save you thou­sands in in­ter­est! Once some­one has paid off their home loan, they of­ten change their in­vest­ment debt from in­ter­est-only to prin­ci­pal and in­ter­est, as this should not only get them a bet­ter rate, but ideally they want to be debt-free by re­tire­ment.

You might be sur­prised at how much dif­fer­ence the right strat­egy can make over the life of your loans, so ask your mort­gage bro­ker or fi­nan­cial ad­viser to work with you to build the right strat­egy for you.

Any ad­vice in this pub­li­ca­tion is of a gen­eral na­ture only and has not been tai­lored to your per­sonal cir­cum­stances. Please seek per­sonal ad­vice prior to act­ing on this in­for­ma­tion.

Wher­ever you call home, mort­gage ad­vis­ers rec­om­mend pay­ing off your home loan as quickly as pos­si­ble

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