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How to cut your home loan repayments today

Forget the RBA, you can lower your mortgage repayments right now.

Compilation image of Nicole sitting on the stairs and money in back pocket to represent home loan repayments
Discounted repayments is still on the cards for some borrowers. (Source: Supplied/Getty) (Samantha Menzies)

This week’s unexpected interest rate hike took the money market, and most economists, by surprise. And now we’re all living with the legacy of 11 interest-rate hikes in one year. The silver lining is that rates are still expected to begin falling as early as late-2023… but that’s still seven long months of potential hikes.

But you might be able to get a repayment reprieve much sooner.

Read more from Nicole Pedersen-McKinnon:

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The cheapest variable rates in the land – you don’t want to go with fixed rates right now – are 134 basis points below the undiscounted big bank rate. (Here’s an important thing to note: in this article we’re looking at rates before this latest hike, because lenders will pass on the latest 25 basis point rise at different times.)

Of course, you shouldn’t be paying the undiscounted big bank rate. Analysts and home loan professionals have started referring to the advertised or headline rate as just an “index rate”, almost a benchmark from which to negotiate a discount.

How to get the biggest discount

Unfortunately, that negotiated discount – whether you are a new customer or attempting to refinance – won’t be as big as it has been over the past few months. That’s because Australian borrowers have edged closer to home loan default territory while overseas banks have wobbled… so variable rates have been creeping up ‘out of cycle’.

The bottom line is that our lenders aren’t vying so fiercely for your home loan business anymore, which is clear from how they have been quietly repricing independently of Reserve Bank of Australia (RBA) moves.

Variable rate hikes from the big four banks since 1 March*

(Source: Supplied)
*These hikes are in addition to the 0.5 per cent increase on the back of the RBA’s March and May decisions. (Source: RateCity, as at May 1, 2023.)

But big discounts, for certain borrowers, are still on the cards.

How do you secure the best-value loans?

If you have a chunk of equity, particularly over 40 per cent, you are most likely to be offered the cheapest rates today because lenders now reserve the largest discounts for those customers.

‘Money off’ for ‘money already repaid’ is their new preferred method of maximising their numbers of low-risk mortgage holders. Whether you have a Big Four lender or not, you should ask for an interest discount, citing the market-leading 5.04 per cent rate (remember this will go up 25 basis points, like every other loan, any day now).

If that fails, though, your best chance of getting ‘money off’ is to ditch your lender and switch to such a better deal. Or work yourself into a position to do so.

(Source: Supplied)
(Source: Mozo, rates current at 1 May 2023)

The average discounted rate – although it’s become less meaningful to take an average because the discounts have become so tiered – is for-now 5.91 per cent, according to Mozo. But you could be paying as little as 5.04 per cent (again, this will go up by 25 basis points).

Why these loans and not others?

It’s vital to realise that there are cheaper loans in the market… and you don’t want them. This column always applies a unique and important filter unavailable on comparison websites: it considers only loans backed by authorised deposit-taking institutions (ADIs).

This means that they can offer offset accounts, which are an incredibly powerful debt reduction tool. Vitally, these offsets will be real offsets, rather than the ‘fake’ ones advertised by many bargain-basement online lenders that are redraws in disguise (all-in-one style loans where your savings are mixed with your debt).

Only lenders with ADI status can offer genuine offset accounts. As such, only money held with these lenders will be covered by the Federal Government’s Deposit Guarantee if an institution goes bust. The other big difference is that genuine offset accounts are quarantined from your lender – they cannot lock up your money if you get into financial trouble. Both things could prove crucial.

Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me, available at www.nicolessmartmoney.com. Follow Nicole on Facebook, Twitter and Instagram.

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