With times now so financially tight, there is a way you can work the system rather than work harder. I feel lucky to have paid my mortgage off in seven years - saving roughly $200,000 in interest in the process - and if there was ever a need for others to follow suit, it would be during this climate of rapidly rising interest rates.
The popularity of my book, How to Get Mortgage-Free Like Me, shows many people are looking to fight back against rate hikes. We have already passed the point where your mortgage interest – 6.363 per cent – doubles the price you ultimately pay for your property.
But I want to share three strategies, which I used (there were more than half a dozen actually) to slash my mortgage interest bill, ‘free’. You see, while you might have the ‘inspiration’ from those 13 rate hikes to get the mortgage down, what you need is my 'WIN-spiration' - how to work the system rather than work any harder.
Nicole's mortgage-interest saving tips can help you become financially free sooner. (Source: supplied)·Samantha Menzies
Strategy 1: Cull your interest number
Your fightback strategy begins with refinancing. Every Aussie mortgage holder needs to know that mortgage prison has – somewhat – been unlocked. It happened a few months ago that banks now, at their discretion, need only stress-test loans for 100 basis points of rate rises, unlike the 300 basis points - and then some - that we have already had. By the way, non-bank lenders – which are not regulated by APRA – have never had to apply its serviceability test.
That means that far from paying the average variable rate in the market, 7.31 per cent, you could be paying as little as 5.94 per cent right now. The monthly saving on a typical $600,000 mortgage is $516. That’s equivalent to five rate cuts. Better still, it translates to $154,869 across the life of the loan.
I have built a free app so you can calculate the savings you can score from getting a better deal. Key in your own numbers on My Mortgage Freedom Date on iPhone and Android.
And remember, you can still haggle if you don’t think you will get approved, or simply threaten to leave to secure a lower rate, or actually do it.
Nicole Pedersen-McKinnon has helped many Aussies save money on their home loan. (Source: supplied)
The discounts given – because a lender wants to keep you amid a refinancing frenzy – have been as high as 2.32 per cent. My top tip: Fill out what’s called a mortgage discharge form and really call their borrowing bluff. And once you get that hugely better deal, here’s the technique for pure repaying power.
Strategy 2: Slash but still stash
We can all agree saving $154,869 is good. But you can take your savings stratospheric with one simple trick: what I call ‘up stumps but still stump up’. In other words, get a lower loan interest rate but keep making your current level of repayments.
When you keep paying the same amount on your cheaper mortgage, it brings your mortgage-freedom date forward by years. My app also automatically calculates your personal savings from this genius mortgage-reduction strategy.
Using the example of the $600,000 mortgage from above, here's how you save on the total interest you pay.
You start with interest that more than doubles the price of your house. But your savings, compared to where you started, almost doubles to $298,626 or near enough to $300,000. You also shave five years off your time in debt, at which point your whole monthly repayment becomes yours to do with what you will.
But perhaps it’s not feasible to keep your repayments at their existing level right now. That may well be why you are reading this column after 425 basis points of hikes. So, let’s look at just one of my strategies to get a free kick to kick mortgage debt.
Strategy 3: Use every dollar twice
The humble offset account is a debt-busting secret weapon. Once you know how to spot a real offset account, it can bring your mortgage-freedom date dramatically forward, free.
It lets you deploy every dollar to your name, both for its purpose and to slash your interest bill. Perhaps you have $10,000 sitting in offset accounts (such as your 'Holy Shit' fund of, ideally, six months' salary, and your savings for your next trip/couch/car and perhaps the kids’ education). Even if you have no savings to your name, if you are disciplined, you can sit your salary in an offset account for the entire month and live off a credit card until the bill is due. This way you use the bank’s money to get your principal down and hopefully you will come out years and hundreds of thousands of dollars ahead.
Let’s take that average home loan and assume you have $10,000 of emergency/savings and $10,000 of salaries offsetting against it at all times. That $20,000 saves an extra $63,544 – that means it more than triples. It also shaves almost 1.5 years off your time in debt.
I did all the above and more and it meant I was able to pay my mortgage off in seven years. The other debt-reduction hacks that I used included paying fortnightly – carefully – and structuring my banking strategically to mobilise my money like never before.
