It’s now a year since the health and wealth world threatened to fall off a coronavirus cliff. Lockdown started, stimulus flowed and – as the emergency took hold – interest rates plummeted.
While those first two factors have been largely unwound now there’s a vaccine, perhaps painfully when it comes to the end of JobKeeper, interest rates remain at rock bottom.
And lenders who, for a while there, were desperate to win what little new business there was, are still fiercely competing to lend to you in the now-booming, buyer-laden property market.
More from Nicole:
But don’t miss the fact that this means a lucrative opportunity if you are an existing borrower; it means that in one fell swoop, you can bank some serious monthly savings.
Just how much is on offer, and where?
Having said that competition is fierce, the big four banks – typically lenders to 80 per cent of Aussies – have kept their rates stubbornly high.
Analysis for Yahoo Finance by comparison website Mozo shows that despite an official cash rate of 0.1 percent, the undiscounted Big 4 average variable interest rate is still 4.51 percent.
Even with the average discount, that reduces only to 3.6 per cent.
Meanwhile, the cheapest quality home loan in the market – so a loan that comes with a genuine offset account – costs only 2.17 percent. That’s almost 150 basis points less.
But that’s all just a jumble of numbers until you realise just what a hack that can mean for your hip pocket.
Say you have a typical $400,000, 25-year mortgage. Refinancing from the undiscounted big bank rate, to the best, quality loan, would net you a cool $497 extra a month. That’s how much cheaper your repayments would be.
What if you get the full so-called discount though? Even moving from that would save you $295 a month.
But if you can forego that boost to your bottom line, there’s a way of turning this into far more money.
Don’t move repayments and halve your interest
If you simply what I call “up stumps but still stump up”, you take the savings stratospheric. And I’m talking not just in money, but also in time in debt.
Your interest bill by shifting from the discounted rate, more than halves. It goes from $207,204 to just $95,384. This is, of course, because you haven’t just secured a cheaper rate but are now also paying $295 extra a month…don’t forget, though, you are used to paying this amount so, hopefully, it’s not even that painful.
Effectively, it’s a free saving because of what you’ve been paying before.
Of course, you make a matzoh if your big bank has neglected to tell you the secret deals it does with other customers. Moving from the undiscounted 4.51 percent rate to the top 2.17 percent rate saves you almost $200,000, taking your bill down to $84,185, from $267,681.
Should I fix my loan?
A lot of Aussies have been locking in their interest rate, lured by loans that start not with a ‘2’ but with a ‘1’.
In fact, Mozo has calculated that 29 per cent of the Big 4’s loan books is now fixed. This is up 12 per cent over the past year.
Fixed rates are certainly better value than they have ever been, but just watch that the companion variable rates are often disproportionately high. Many lenders are relying on this ‘ratchet up’ when your fixed-interest period ends, to quickly recoup their lost profit.
This is also a consideration given my belief you should only ever fix half of your loan. One reason is that fixed rates may not come with a full offset account, which are incredibly powerful in terms of paying down debt quickly. They let you use every dollar you have to your name to reduce your interest bill and time in debt.
But the second big factor is that paying extra not directly into a mortgage but into offset accounts attached to it affords significant safety in terms of avoiding the type of redraw raid we saw ME Bank execute almost a year ago… and then swiftly reverse on the public and political backlash.
If you decide to fix, make sure you find a product that has both a competitive fixed and variable rate. And seriously think about going 50:50.
Whatever you decide to do, one year after the COVID crisis began, there are big bottom-line boosts on offer.