What would you say if I told you that you could cut the amount of money you pay each month for your mortgage by around $250 by making a simple phone call?
What are your thoughts on the possibility of paying off your mortgage at least half a decade earlier than you now are? That you could reduce the total amount of your repayments by more than ninety thousand dollars?
People have the misconception that calculating mortgage payments is a difficult task. However, if you have a little bit of business sense and self-control, it is much simpler than you might think to beat the banks at their own game.
As a broker, I believe it is my responsibility to outline four straightforward measures that might get you closer to achieving financial independence from your mortgage lender. This is because homeowners are about to face the possibility of additional interest rate increases in 2023.
Getting out of your mortgage debt can be accomplished in only four easy steps.
There is a little bit of housekeeping to take care of before we kick off.
When it comes to money, everyone’s circumstances are unique. The following is some general advise that I am going to provide you. Before you make any significant choices, it is advisable to consult with a financial representative or a broker.
For the sake of demonstrating how to perform example computations, I will be using the average variable rate mortgage, which is now 5.60 percent at the time of this writing.
It is estimated that the typical amount of money due on a mortgage in Australia is just around $600,000. When I begin my calculations, I will begin with a starting point of $600,000 so that things are simpler.
Let’s also assume that this $600,000 loan with a 5.60 percent interest rate is a principle and interest loan with a 25-year term. This means that the homeowner is paying down not only the amount that was borrowed (the principal), but also any interest that was added to it.
Is everything okay? Now, let’s get going.
Step 1: Switch to a fortnightly payment
The repayment of mortgages on a monthly basis is rather typical. But the majority of lenders will provide you the option to make payments every two weeks. Allow me to explain why this would be a good idea.
Your monthly payments will be more expensive than your fortnightly installments for a month that is four weeks long.
Even when the months are longer, making repayments every two weeks might be beneficial to your cash flow. Particularly if you are paid every two weeks. Smaller payments made frequently can be easier to manage than a large sum paid all at once every month.
A year is comprised of a greater number of fortnights than there are months. This indicates that you will pay off a greater amount in twenty-six weeks than you will in a year. The fact that you will be debt-free sooner is a positive development.
In this situation, you are making use of the power of compound interest. Not to worry if you find yourself needing to Google that phrase. The essence of the matter is that you are well on your way to maybe paying off your loan three to five years earlier.
What does that mean in real numbers?
In the hypothetical scenario if we are using a loan with a principal and interest rate of 5.60 percent and a loan amount of 600 thousand dollars, the monthly payment would be $3,721. Changing to a payment schedule of every two weeks will bring the total to $1,861.
Repayments would amount to $4,032 throughout the course of a month period of four weeks. Additionally, assuming the interest rate were the same during the duration of the loan, which it will not be, they would be paying the bank $90,296 less in interest throughout the course of the loan’s lifetime.
A loan that was paid off three years and nine months ago was saved. $90,296 in interest was not accrued.
Step 2: Call your bank’s bluff
I always tell my customers to “go back to your bank and ask them to lower your interest rate.” This is the first piece of guidance I give to any of my customers.
Please hold on a second, Sophie – Is it supposed to be you who acts as my broker and puts in all of the effort? What, you’re just going to take me back to my bank account?
Indeed. Yes, I am. Moreover, there is a valid explanation for that.
It is possible that you have observed your lender advertising very appealing deals to prospective customers that are far lower than the amount that you are now paying. That’s the loyalty fee you pay for being a good client who doesn’t cause any problems.
So I want you to make a big deal out of this. You should give your lender a call and inquire about the greatest interest rate that they can offer you. Bring to your attention the fact that you would be paying less if you were a new customer. It is highly unlikely that they will match it, but they might offer you a discount.
Do not, however, end there. This is the first component of your leverage that you have now.
In the meantime, talk to your broker. Share with them the benefits that the retention team at your bank has made available to you. At this point, we will embark on our work.
You may expect a professional broker to provide you with a few realistic refinancing possibilities that will ideally be on par with, or even better than, what your current lender is able to provide for financial assistance. In addition to that, there is a significant likelihood that you will also receive a cashback offer right now.
Numerous lenders are competing for your debt, and they are throwing money at mortgage holders in order to earn their business. On the other hand, even if you have only two hundred and fifty thousand dollars left on your mortgage, you could be able to get cashback deals in the region of three thousand to four thousand dollars. The headline offers are for residences with mortgages that are one million dollars.
You are now in the second phase of your leverage.
After then, you should meet with the retention department of your bank one more. It is likely that it will say something like this:
“Hello, I am grateful that you have reduced my interest rate. On the other hand, I have been doing some comparison shopping, and I have found that your rival is providing me a loan that is at least 0.5% lower than what you have offered me, and they are also paying me $3,000 as a reward for switching. Where do you stand in comparison to this?
There is a possibility that you may be presented with a very generous rate as well as a retention incentive. Alternately, they might come close, but they won’t be able to go as low as the rate that your broker has established for you.
Whatever the case may be, you are in charge at this point. Even if you are just successful in getting the bank to reduce your interest rate, you will most likely still be able to reduce the amount that you pay back each month.
An example
Each individual will experience this in a very unique way. With that being said, let us assume that our hypothetical mortgage holder has successfully lowered their interest rate to 4.99% and received $3,000 in cash back as a result of refinancing with a new lender.
To be more specific, they continue to make payments every two weeks, which amounts to $1,752 based on the 4.99% interest rate. This results in an additional $236 being returned to their bank balance each month.
In the meantime, the total amount of interest that is charged decreases from $516,133 to $378,438. This represents a reduction of $137,695 that is deposited into the bank’s account over the course of the loan’s (now shorter) duration.
Of much greater significance is the fact that the total amount of principal and interest payments that they have to make over the course of the loan’s term has decreased to $978,438 from $1,116,133.
Financial independence appears to be getting closer and closer all of a sudden.
Every month, you will save $236* Step 1 and 2 will save you $236 per month. To date, we have avoided potential interest totaling $137,695 * Cashback amount: $3,000A portion of the’savings’ that were made in Step 1 will be applied to additional repayment.
Step 3: Use an offset or redraw
How are you doing? Ready to make a refinance? Take a moment to pause.
There is something that I did not say to you in the second step. This was done in order to convince your broker to locate an option that included either a redraw or an offset.
With an offset account, you can think of it as a savings account that is connected to your mortgage. Not only may you use the offset as a savings account, but you can also put a portion of your loan into it. You can even pay your paycheck into the offset.
Here, however, is the exciting part. It will not be subject to interest and will be deducted from the total amount of your mortgage.
What makes something a positive thing? On a daily basis, the interest that is accrued on your home loan is calculated by the lender. As a result, the interest that you would pay on your loan will be cheaper if the principal amount is lower.
Therefore, if our owner of a $600,000 home has $10,000 in the offset account, they will only be subject to interest on their loan equivalent to $590,000.
Redraw accounts are comparable to traditional accounts, but it is more difficult to access your money, and there are fees and constraints associated with them.
I won’t go into too much detail, but as a general rule of thumb, redrawing may be a bit better if you don’t want to touch your savings too much, whereas offset may be ideal if you are a bit more strict in what you pay in and what you take out of your account. When it comes to this matter, you should discuss it with your broker.
You won’t see a significant reduction in your monthly payments if you make a little offset or drawdown. Using the example of the $10,000 offset on our hypothetical homeowner, they would only save an additional $29 per month if they had an offset at 5.60 percent.
In some instances, the lender would maintain the same number of repayments, but they will reduce the principal amount that you owe.
However, the true benefit accrues over the course of time. This would result in a reduction of $26,047 from the total lifetime repayments and a reduction of slightly more than $29,518 in interest that would have been avoided if that amount remained constant in their offset and nothing else changed over the course of their loan’s lifespan (again, this is not something that would occur in real life).
An example
In light of the fact that our homeowner’s loan is currently at 4.99%, they have decided to deposit $50,000 into a redraw facility, which they will not be using.
Instead of $600,000, they are now only garnering interest on $550,000 that they put up. And they continue to make payments every two weeks.
Repayments have been reduced to $1,617 every two weeks at this point. Two hundred and ninety-two dollars was saved in just a month’s time.
In the meantime, the total amount of interest that is being charged is $270,220, which is an additional $108,218 that has been removed, and the total amount that is being repaid on the loan has now decreased to $708,218.
Every month, you will save $292 Steps. Savings of $528 per month for one to three months $245,913 in potential interest income has been avoided so far.
Rebate amount: $3,000 Two years and seven months would have been saved on your debt. *A few of these processes are rendered unnecessary by the fact that some lenders choose to maintain the repayment amount in its current state, applying more to the principal than to the interest.
Step 4: Overpay your mortgage
Saving money on a monthly basis has been the focus of the first three steps in this particular process. At this point, I am going to recommend that you return a portion of the money that you have saved to the bank.
Hold on, what is it?
Returning to the objective of paying off your mortgage as rapidly as possible, let’s get straight to it. One of the simplest ways to accomplish this is to pay more than what is required of you.
Furthermore, at this point, you should have had saved a few hundred dollars in monthly repayments, so the idea of overpaying shouldn’t be too much of a terrible experience for you.
In my opinion, one of the most prudent things you can do is to overpay for something, provided that you have the financial means to do so (which is not something that everyone will be able to do). It has the potential to shorten the lifetime of a loan by a number of years, and you will be subject to a lower interest rate.
There is no way around the fact that your monthly payments are likely to increase if you are one of those homeowners who fixed their mortgage at a rate lower than 2% when interest rates were low.
When your lender decides to switch you to a rate that is higher than 5%, it is preferable to get used to paying at a higher rate before your current rate expires. This will prevent you from having to make some unexpected adjustments to your budget.
In addition to this, it sends a message to any potential new lenders that your household is responsible and can be trusted with a reduced interest rate.
Be aware: you should not automatically expect that your lender will apply any overpayments to the principal of your loan. In the event that additional repayments are applied to your interest, you are essentially throwing aside money. You should always be sure to ask for and obtain written confirmation that anything that goes above and above will reduce your principal.
If someone with a fixed rate of 1.99% began making payments at 4.46%, which is the lowest rate currently offered by Compare Club’s panel, then they would pay off their debt eight years earlier if nothing changed (this is not going to happen, but we can hope).
But what about the hypothetical residential property owner? Let’s have a look…
An example.
A loan of $600,000 with a term of 25 years and a rate of 4.99% is now being held by our homeowner, with just $550,000 of this total amount being subject to interest.
So what happens if they choose to keep paying at the same rate of 5.60 percent as before and add an additional $109 to the amount that they pay each month toward the repayment of their mortgage?
Yes, the amount of the repayments has increased to $1,591. That is not a problem. They are still paying a significant amount less than they were at Step 1.
But now the total interest that is charged is $210,985 – that is an additional $59,235 that is not paid in interest – and the total repayments that are required over the course of the loan’s term have been reduced to $810,985.
What’s the best part? A loan with a term of twenty-five years has recently been reduced to a loan with a term of fewer than twenty years.
In conclusion, These are the stages that not everyone will be able to follow, and not everyone will be able to save as much as our hypothetical client.
The main thing, however, is that there are ways and means to reduce the amount of money you have to pay back on your mortgage. Simply doing steps 1 and 2 can have a substantial impact on the amount of money in your bank account.
When it comes to this four-step example, what did our homeowner end up saving in the end?
In a month that consists of four weeks, they have been able to save $528 on their monthly installments.
They were able to avoid paying a theoretical total of $305,148 in interest throughout the course of their loan’s lifespan (the amount will be lower due to the fact that… well, real life). But I think you get the point).
The total amount that might be repaid throughout the course of their loan has decreased from $1,116,133 to $810,985 over the course of its existence. Compared to what they were facing at the beginning, this is a significant decrease of $305,148.
They have been able to recoup three thousand dollars by refinancing their loan with a different financial institution.
They are on track to pay off their loan at least five years earlier than the original schedule.
I hope that this gives you a greater sense of confidence that you will be able to pay off your mortgage in 2023, regardless of the circumstances of your financial condition.
It is possible to accomplish this goal, but it will require some effort on the part of both you and your broker. And if you do not have a broker, then my coworkers and I would be delighted to have a conversation with you.
