It’s time for a Eureka mortgage repayment realisation: The extent of the rapid rate rises now means that the interest you could potentially fork out on your home would double the cost of it.
Yes, the interest you pay could, scarily, equal your original property outlay.
Unless you take action.
The average Big Four mortgage rate has reached 7.1 per cent undiscounted, says Mozo.
Of course, if you’re a Big Four customer you should (at least) be getting a standard discount.
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So, homeowners who are not in the know will now be paying about 80 basis points less.
This is almost exactly the rate at which interest doubles your initial cost: 6.36 per cent.
How you can dramatically cut mortgage costs
The thing is, Mozo says the best deal on the market from a comparable, quality lender is 4.04 per cent.
This is three percentage points lower than the big banks are advertising.
Now, when I say a ‘quality’ loan I mean that it is backed by what is called an authorised deposit-taking institution.
This is important because it means it is literally authorised to take deposits and can offer genuine offset accounts that are connected to but also quarantined from your loan.
The problem with this is that banks can and have re-calculated your available redraw amount.
With all-in-one style loans, a lender could simply get your repayments wrong and suck up savings that you have housed in the loan.
Or, if you get into financial trouble (not beyond the realms of possibility right now), they could choose to keep that money in reserve for themselves; you owe them and the fineprint says that means they are entitled to.
A genuine offset account offers far more safety – and also a whole lot of flexibility to move down the track.
So it is important.
The best mortgage deals going
Getting back to the 4.04 per cent rate, this is available today from MOVE Bank and 4.14 per cent is also on offer from Police Credit Union.
Even moving to the latter from the big bank headline rate of 7.01 per cent would cut your repayment by $1,100 a month. Or $13,200 a year.
That’s almost $400,000 overall, cutting your ultimate interest bill down to $456,045, from $852,179.
It’s likely that you can save a huge amount of money and is also the reason there is a spike in refinances right now. Recent months have seen a record number of borrowers – tens of thousands – jumping ship to a far more attractive lender.
But here’s the thing: it’s possible because of the sheer size of the rate rises so far that you may not pass a fresh serviceability test to be able to qualify for a new loan.
The Reserve Bank has hiked by 275 basis points, which is getting close to the 300 basis points new loans were ‘stress tested’ for future possible rate rises.
But loans taken out before October 6 last year were not even forced to flex so hard… at only 250 basis points.
The RBA has already sailed straight past said stress test.
And that’s why a new loan may no longer be an option for you.
The exception might be if your loan is a few years old and you have happily seen income increases in that time.
So, what do you do if you are locked in a loan that threatens to double your housing cost?
A mortgage war is on: Here's the secret solution
Mercifully, the spike in switching has caused a behind-closed-door mortgage war.
So desperate are lenders to keep you on their loan books that you may find you can get an enormous saving by simply getting a bit demanding.
Know your benchmark interest rate – that 4.04 per cent from MOVE Bank.
You could then call up your existing lender and throw your weight around, threatening to leave them for this enticing offer.
And you’re likely to get some interest-rate joy from this approach.
But a far better strategy is to call their bluff. Fill out what’s called a mortgage discharge form online and name the above or another competitive lender as one to which you are switching.
With any luck, your lender has been instructed to hang on tight to loans and stem the outflow of interest.
But don’t blink until your mortgage is supposed to be ‘discharged’.
To help, bear in mind that mortgage discharge forms are super easy to cancel at the very last minute.
Indeed, your lender might not even come to the party until that last minute. Many are acting only at the 11th hour.
But even if they don’t, and you don’t cancel the mortgage discharge, it’s likely they won’t act on it. Lenders usually need a significant nudge to get your loan closed and of course they cannot actually do this unless there is a loan to pay them back what they are owed.
In other words you have nothing to lose but excessive interest. Good luck.