Time to read : 8 Minutes
What if I told you that, with a quick phone call, you could off reduce your monthly mortgage repayments by around $250 ?
Would you believe there is a way to pay off your mortgage at least half a decade earlier? Or that you could cut more than $90,000 off your total repayments?
People think figuring out mortgage repayments is hard work. But with a bit of smarts and discipline, it’s easier than you think to beat the banks at their own game.
With homeowners facing the spectre of more interest rate rises in 2023, I feel it’s my duty as a broker to spell out four simple steps that can get you closer to financial freedom from your mortgage lender.
Four simple steps to financial freedom from your mortgage
Before we get started, a quick bit of housekeeping.
Everybody’s financial situation is different. What I’m about to tell you is general advice. Speak to a financial professional or a broker before you make any big decisions.
The average variable rate mortgage is, at the time of writing, 5.60% – so I’ll be using this number when I show example calculations.
The average amount owed on a mortgage in Australia is a bit shy of $600k. To make things easier, I’ll use $600k as the starting point for my calculations.
We’ll also assume this $600k loan at 5.60% is a 25 year principal and interest loan, where the homeowner is paying down both the amount borrowed (the principal) and any interest on top of it.
All good? Okay, let’s go.
Step 1: Switch to a fortnightly payment
Monthly mortgage repayments are pretty common. But most lenders will offer you the option to pay fortnightly. Here’s why this can be a good idea.
In a four-week month, fortnightly repayments will cost you less than monthly payments.
Even in longer months, fortnightly repayments can help with your cash flow. Especially if you're paid fortnightly. Little and often can be easier to manage than a big lump sum each month.
There’s more fortnights than there are months in a year. This means you’ll pay off more in 26 weeks than you will in 12 months. This is a good thing: you'll be debt free quicker.
You’re using the power of compounding interest here. Don’t worry if you need to Google that phrase. Essentially, you’re on your way to potentially paying off your loan 3-5 years earlier.
What does that mean in real numbers?
Using a $600k 25-year principal and interest loan at 5.60% as our example,our hypothetical homeowner would be paying $3,721 a month. Switch to paying every two weeks and that becomes $1,861.
In a four-week month, they’d be paying $4,032 in repayments. And over the lifetime of the loan – if the interest rate remained the same (which it won’t) – they'd be paying $90,296 less in interest to the bank.
Savings: Loan paid out 3 years and 9 months earlier. Interest avoided: $90,296
Step 2: Call your bank’s bluff
The first piece of advice I give any of my clients is “go back to your bank and ask them to lower your interest rate".
Wait a minute, Sophie – you’re meant to be my broker and doing all the hard work? And you’re just batting me back to my bank?
Yes. I am. And there’s a good reason for that.
You may have noticed your lender spruiking very attractive offers to new customers that are a lot less than what you’re paying. That’s your loyalty tax for being a good, fuss-free customer.
So I want you to kick up a fuss. Call up your lender and ask them what is the best rate they can give you. Point out that if you were a new customer you’d be paying less. I doubt they’ll match it, but they may offer you a reduction.
But don’t stop there. You’ve now got part one of your leverage.
Now, speak to your broker. Tell them what you’ve been offered by your bank’s retention team. This is where we’ll get to work.
A good broker will come back with a few realistic refinancing options that will hopefully be as good, if not better, than what your current lender can offer. And there’s a good chance right now you will also get a cashback offer.
Plenty of lenders are throwing money at mortgage holders as they compete for your debt. The big headline offers are for properties with million-dollar mortgages, but you may be able to find cashback offers in the range of $3,000 to $4,000 even if you’ve only got $250k remaining on your mortgage.
This is part two of your leverage.
Next, have another chat with your bank’s retention department. It’ll probably go something like this: “Hi, thanks for dropping my interest rate. However, I’ve been shopping around and your competitor is offering me a loan for at least 0.5% less than what you’ve offered me and they’re giving me $3,000 for switching. What can you do to match this?”
You may get lucky and be offered a very generous rate and a retention bonus. Or they may come close but can’t go quite as low as the rate your broker has found you.
Either way, you’re in control at this point. Even if you only get as far as asking the bank to drop your rate, you’ll probably still cut your monthly repayments.
Give me an example!
This will be very different for everyone. But let’s assume that, by refinancing with a new lender, our hypothetical mortgage holder has now managed to get down to 4.99% with $3,000 cash back.
Oh, and they’re still paying fortnightly which is $1,752 on the 4.99% rate to be precise). That’s an extra $236 per month back on their bank balance.
Meanwhile, the total amount of interest charged drops from $516,133 to $378,438 – a cool $137,695 less into the bank’s pockets over the (now shorter) life of your loan.
And more importantly, their total principal and interest loan repayments over the lifetime of the loan now sits at $978,438, down from $1,116,133.
Suddenly financial freedom looks that little bit closer.
Monthly savings: $236* Step 1 & 2 monthly savings: $236 Potential interest avoided so far: $137,695 Cashback: $3,000 *Note: some of the 'savings' in Step 1 goes into extra repayment.
Step 3: Use an offset or redraw
Feeling good? Ready to refinance? Hold on a minute.
There’s something I didn’t tell you in Step 2. And that was to get your broker to find you an option with an offset or redraw.
An offset account is like a savings account attached to your home loan. You can put a portion of your loan into the offset and use it as a savings account, even paying your salary into it.
But here’s the good part. It’s offset against your mortgage total and doesn’t attract interest.
Why is this good? Well, lenders calculate interest on your home loan on a daily basis. So the lower the principal amount in your loan, the less interest you’ll pay.
So if our $600k homeowner has $10k in the offset account, they’ll only attract interest of $590k on their loan.
Redraw accounts are similar-ish but it’s a bit harder to access your money and there are fees and limits involved.
I won’t go into too much detail but as a rule of thumb, redrawing can be a bit better if you don’t want to touch your savings too much, while offset is good if you’re a bit more disciplined in what you pay in and take out. Like I say, speak to your broker about this one.
A small offset or redraw won’t save you that much in monthly payments. Using the $10k offset example on our hypothetical homeowner, they’d only save another $29 a month if they had an offset at 5.60% and in some cases the lender keeps your repayments the same, but reduces the principal amount you owe.
But … the real advantage comes over time. If that amount remained constant in their offset and nothing else changed over the lifetime of their loan (again, this won’t happen in real life) then that would be a bit over $29,518 avoided in interest and $26,047 knocked off the total lifetime repayments.
Give me an example!
Our homeowner is now down to 4.99% and has opted to put $50k into a redraw facility, which they’re not touching.
They’re now only attracting interest on $550k instead of $600k. And they’re still paying fortnightly.
Repayments have now dropped to $1,617 a fortnight. That’s another $292 saved in a four-week month.
Meanwhile, total interest charged is $270,220 – another $108,218 chopped off – and total loan repayments now dip to $708,218.
Monthly savings*: $292 Steps 1-3 monthly savings: $528 Potential interest avoided so far: $245,913 Cashback: $3,000 Time saved on your loan: 2 years and 7 months. *Note: some lenders keep the repayment amount 'as is', applying more to the principal than the interest which negates some of these steps.
Step 4: Overpay your mortgage
The first three steps have all been about saving money on a monthly basis. I’m now going to suggest you give some of what you’ve saved back to the bank.
Let’s get back to the goal of paying off your mortgage as quickly as possible. The easiest way to do this is by paying more than you have to.
And, hopefully, by this stage, you’ve already saved a few hundred dollars in monthly repayments, so overpaying shouldn’t be too painful.
I actually think overpaying is one of the most sensible actions you can take – if you can afford it (and not everyone will be in this situation). It can reduce the lifespan of a loan by several years and you’ll get hit with less interest.
If you’re one of those homeowners who fixed under 2% when rates were low, you’re going to face a hike in monthly repayments no matter what.
It’s helpful to get used to paying at a higher rate before your rate expires, rather than having to make some emergency budget adjustments when your lender moves you to a 5%+ rate.
Plus, it signals to any new lenders that you’re a responsible household that can be trusted with a lower rate.
Be aware: don’t assume your lender will put overpayments towards your principal loan. If additional repayments go towards your interest, you’re throwing money away. Always ask and get written confirmation that anything above and beyond will pay down your principal.
If somebody on a 1.99% fixed rate started paying at 4.46% – the current lowest rate on Compare Club’s panel – then they’d pay off their loan eight years early if nothing changes (that definitely won’t happen, but we can dream).
But what about our hypothetical homeowner? Let’s see …
Give me an example!
Our homeowner is sitting pretty on a 4.99% 25-year loan of $600,000, with only $550k of this amount attracting interest.
So what happens when they decide to continue paying at their old 5.60% rate and put an additional $109 into repaying their mortgage each month.
Yes, repayments jump back to $1,591. That’s fine. It’s still a lot less than they were paying at Step 1.
But now the total interest charged is $210,985 – that’s another $59,235 avoided in interest – and the total repayments over the lifetime of the loan now drop to $810,985.
Best of all? That 25-year loan has just become a less-than-20-year loan.
The bottom line
Not everybody will be able to follow these steps or save as much as our hypothetical homeowner.
But the point here is that there are ways and means to hack away at your mortgage repayments. Steps 1 and 2 alone can make a significant difference to your bank balance.
So, what did our homeowner end up saving in this four-step example?
In a four-week month, they’ve saved $528 on their repayments - per month.
They’ve managed to avoid a potential $305,148 in interest over the lifetime of their loan (it’ll be less because … well, real life. But you get the idea).
The total potential repayments over the lifetime of their loan has dropped from $1,116,133 to $810,985. That’s a massive $305,148 less than they were facing at the start.
They’ve got $3,000 back in their bank account through refinancing with a new lender.
They’re on course to pay off their loan at least five years early.
Whatever your financial situation, I hope this makes you feel more confident that you can get on top of your mortgage in 2023.
It’ll take some effort from both yourself and your broker, but it can be done. And if you’ve not got a broker, then my colleagues and I would love to chat.