How to avoid the impending pain of mortgage repayment
And choosing NSW – purely because it has the highest average property value – a full 3 percentage point interest rate hike to 6.45% would cost an extra $1,340 per month. This would also bring the total interest bill over the life of the loan on what you borrowed to $781,970.
A rate hike of 4 percentage points, to 7.45%, would increase your monthly expenses by $1,830 and cost you almost $1 million in interest.
So what can we do?
Enter into a solution
The evolution of fixed-rate mortgage rates has long told us that the cash rate is on the rise.
Exclusive analysis for Money by data house Mozo shows that 83 of the 90 lenders that offer fixed-rate mortgages have lifted them in the past six months.
If a spike in repayments is freaking you out, you can always lock in your mortgage rate now. However, keep in mind that you usually can’t make additional payments on a fixed-rate loan, and you probably won’t get a mortgage clearing account – a powerful debt reduction tool.
And do not miss that the latter is a free debt reduction. You can usually stack compensation accounts with every dollar you have in your name – savings for your next vacation; tuition fees; car and your emergency fund up to six months salary.
You can even put your entire salary into the offset account, live off a credit card until the monthly payment is due, allowing the cash pile to reduce your mortgage balance even further. long time.
Depending on loan size, offsetting balance, and interest rate variables, you could save a lot of money and time over the life of your mortgage, without costing you a penny.
Lack of offsets and the inability to overpay are the reasons I advocate securing only half of a home loan.
As a reference for your rate research, Mozo tells me that the average one-year fixed rate mortgage is 2.56%, the two-year average is 2.84%, the three-year average is 3.23%, the four-year average is 3.59% and the five-year average is 3.72%.
The variable portion
If you’re dealing with a major bank, you shouldn’t pay more than the reduced flat rate of 3.45%.
However, many of their customers unwittingly pay much more – up to the advertised but exorbitant average rate of 4.51%. If this is your case, it’s time to ask your bank for a rate reduction.
You can probably do even better if you drop your current loan and switch to a smaller lender that can offer a true clearing account.
With true compensation, you don’t run the risk that your overpayments or the savings you’ve accumulated in your loan will be absorbed into it…and no longer available to you.
The genuine clearing accounts are also, importantly, backed by the government’s $250,000 deposit guarantee. The magic words that tell you if a lender offers a genuine clearing account are if they present themselves as an “Authorized Depository Institution”. The most competitive home loan from such an institution is only 1.85%.
So, forget about any rate hikes. The average $769,459 NSW mortgage holder who switches to this market-best variable rate from an undiscounted Big Four bank rate of 4.51% will save over $1,000 $ per month.
And if you’re comfortable fixing half your loan, the analysis of lenders who offer both the cheapest variable and fixed rates identifies Greater Bank, QBank, Qudos Bank, UBank and Well Home Loans. Maybe start your fight against rising rates by looking there.
- The advice given in this article is of a general nature and is not intended to influence readers’ decisions regarding investments or financial products. They should always seek professional advice that takes their personal circumstances into account before making financial decisions.
Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me. Follow Nicole on Facebook, Twitter or Instagram.
- Jessica Irvine is on leave.