Mortgage – My top five mortgage tips that could help you save thousands
Gone are the days when interest rates changed in lock-step with the Reserve Bank of Australia. Today, if you want to make sure you’re getting the best deal, you’re going to have to work for it.
Meanwhile, international border closures have changed the dynamics of the rental market in many cities.
But first, remember that time I went line-by-line through all 673 household expenses listed by the Australian Bureau of Statistics in its Household Expenditure Survey and categorised them into 10 categories?
I know, fun memories.
Of them, only five fall into my “housing” budgeting category. They are:
- Rent payments
- Mortgage repayments – interest component (selected dwelling)
- Loans for alterations and additions – interest component
- Rent payments (other property)
- Mortgage repayments – interest component (other property)
There are several things to note here.
Consider your principal place of residence as your “selected dwelling” and include rent and interest on any other properties you own or lease as “other property”. And, crucially, only the “interest component” of those mortgage payments.
It can be hard to wrap your head around it but interest on your loan is the “true” cost of providing a roof over your head. Repayments on the principal of your loan are, in fact, a form of savings. They build equity in an asset that you own. In your household budgets, you should classify them as “savings”.
When it comes to rent, include everything you pay to a landlord, real estate agent, parent, friend or anyone else to stay in their property.
OK, so now you’ve spent some time identifying your housing costs. Click here to download a printable PDF worksheet to help you record them. Congratulations, you’re one step out of 10 towards identifying all your major household expenses.
Now let’s shave them.
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Renters, you need to look around to see what similar properties to yours are leasing for.
The coronavirus pandemic has seen an exodus of foreign students and others in the rental market. Prices have fallen in some areas. Politely ask your landlord for a discount, while stressing what a good tenant you have been. If they don’t come to the party, consider moving out to a cheaper place.
Mortgage holders, you can probably bag a saving too. Here are my top five tips for saving on your mortgage.
- Split your loan. I learnt this trick from a banker I dated once. Sadly, it wasn’t love, but I did get a happily-ever-after for my mortgage. Half my mortgage is now fixed for two years at 2.19 per cent and the other half for one year at 2.09 per cent (with an offset account). I estimate it is saving me thousands a year off what I was paying on my old variable rates. The real secret is you can split your loan into as many pieces as you want – some variable rate, some fixed for one year, two years, four years, etc. – and in whatever proportions you choose! Indecision and fear of making the “wrong” decision are the main barriers I see in people considering switching to ultra-low fixed rates. Unsure? Why not have a bet each way?
- Carefully consider all the hidden costs of going fixed. The potential benefits are fixed-interest rates as low as 1.75 per cent (UBank, three years, owner-occupied, up to 80 per cent loan-to-Valuation Ratio, no offset). But be aware of potential costs. Fixed-rate loans usually don’t allow much in additional repayments. Many don’t have offset accounts. There are break costs to exiting the loan within the fixed term. And then there’s always the risk that variable rates go lower, or indeed fixed rates too, after you’ve fixed. But it’s definitely worth considering given the current gap between fixed and variable rates.
- Search comparison websites. Arm yourself with information about the best deals available. Try Finder, Comparethemarket, RateCity or Canstar.
- Know the average that variable-rate lenders are granting on new loans. The Reserve Bank has begun publishing this in an obscure excel spreadsheet available here. As of November 2020, the average interest rate actually paid by all borrowers with outstanding variable-rate loans was 3.17 per cent. BUT GET THIS. The average variable-interest rate paid by NEW borrowers in November was just 2.85 per cent. That’s the loyalty tax right there, friends.
- Take action. Make a cup of tea. Pick up the phone. Be polite. Say you know interest rates have fallen and you are wondering what is the best deal your mortgage lender can do? Ask to speak to the “customer-retention team”, if necessary. Most importantly, just give it a crack. The worst they can do is say “no”.
Until next week, happy saving xx.
Subscribe to Jess’ new weekly email newsletter “Money with Jess” at newsletters.smh.com.au/moneywithjess or newsletters.theage.com.au/moneywithjess and follow her money adventures on Instagram @moneywithjess.
Jessica Irvine is a senior economics writer with The Sydney Morning Herald.