Here’s how to avoid impending mortgage repayment pain
And to go for NSW – just because it has the highest average property value – would cost a full 3 percentage points of rate hike to 6.45 per cent $1340 more per month. It would also bring the total interest bill over the life of the loan for what you borrowed to a whopping $781,970.
A 4 percentage point rate hike to 7.45 percent would add $1830 to your monthly expenses and cause you to pay nearly $1 million in interest.
So what can you do?
Got into a fix
Fixed rate home loan interest rate trends have long told us that cash interest rates are rising.
Exclusive analysis for money Data house Mozo shows that 83 of the 90 lenders offering fixed-rate mortgages have lifted them in the past six months.
If a mortgage surge has you panicking, you could lock in your mortgage rate now. Keep in mind, however, that with a fixed-rate loan, you typically won’t be able to make special repayments, and you probably won’t be able to get a mortgage equalization account either — an effective tool for reducing debt.
And don’t forget that the latter is free debt relief. You can usually stack offset accounts with every dollar you have in your name – savings for your next vacation; school fees; car and your emergency fund of up to six monthly salaries.
You could even put your entire salary into the compensation account and live on a credit card until the monthly repayment is due, allowing the cash pile to reduce your mortgage balance for even longer.
Depending on the loan size, balance, and interest rate variables, you can save a lot of money and significantly shorten the life of your mortgage—without costing you a penny.
Missing settlement payments and the inability to make overpayments are the reasons I advocate fixing only half of a home loan.
As a benchmark for your interest rate research, Mozo says the average one-year fixed-rate mortgage is 2.56 percent, the average two-year is 2.84 percent, the average three-year is 3.23 percent, the average four-year is 3.59 percent, and the five-year average is 3.72 percent .
The variable part
If you’re at a Big Four bank, you shouldn’t pay more than the discounted package price of 3.45 percent.
However, many of their customers are unknowingly paying much more – up to the advertised but extortionate average rate of 4.51 percent. If this is you, it’s time to ask your bank for a discount.
You can probably do even better if you give up your current loan and switch to a smaller lender that can offer a true contra account.
With real offsetting, you don’t run the risk of your overpayments or savings you’ve been sitting on your loan being subsumed into it… and no longer available to you.
Importantly, true offset accounts are also backed by the government’s $250,000 deposit guarantee. When a lender offers a genuine offsetting account, the magic word is when they pose as an “approved depository institution.” The most competitive home loan from such an institution is only 1.85 percent.
So forget possible rate hikes. The average NSW mortgage holder of $769,459 moving from an undiscounted Big Four bank rate of 4.51 per cent to this market-best variable rate saves more than $1000 a month.
And if you want to fix half of your loan, analyzing lenders that offer both the cheapest variable and interest rates identifies Greater Bank, QBank, Qudos Bank, UBank and Well Home Loans. Maybe start your rate hike battle by looking there.
- The advice in this article is general in nature and is not intended to influence the reader’s investment or financial product decisions. You should always seek your own professional advice, taking into account your personal circumstances, before making any financial decisions.
- Jessica Irvine is on vacation.