Taming the mortgage monster should be the top priority of all Australians with a home loan.
Hmm, on second thoughts it’s probably the second top priority behind getting rid of consumer debt … outstanding credit card balances and personal loans.
But while the interest rates on credit cards and personal loans are extortionate (they haven’t come down at all following repeated RBA cuts) the size of these loans are much smaller than the average home loan.
For that reason the mortgage really is the loan monster of most normal Australian families. It always has been. And it still is for Libby and I, as well as for our children and their families.
But with interest rates so low, there has never been a better time to take a big stick to that loan.
There are four key strategies I’m advising my kids to follow;
SAVINGS ARE FOR MUGS
If you have a mortgage you should have no savings. It’s that simple.
Interest rates through online savings accounts are horrible at the moment. You can barely get a 1 per cent return on them … and then it has to be declared as taxable income.
So put any savings into the mortgage, making sure you have the ability to redraw in case of an emergency or a big ticket expense.
It’s simple maths … why earn 1 per cent on a savings account when you can pay off a debt charging 3-4 per cent interest.
KEEP PAYING THE OLD HIGHER RATE
While the banks are bastards for not passing on the full Reserve Bank rate cuts, they have passed some of it on and repayments have fallen.
Instead of those repayment savings disappearing into the general family budget (and probably lifestyle spending like travel and entertainment) keep repayments at the higher pre rate cut level.
The extra repayments will slash the loan principle and, in turn, save even more interest.
NEGOTIATE A DISCOUNT
First, read the most recent home loan statement and understand the interest you’re currently paying. Then go to a comparison site like www.canstar.com.au and compare it with other financial institutions.
Then ring your financier and ask for a better deal … a discount on your current rate. You’ll be amazed at the result. My kids have negotiated a 0.5 per cent discount on top of the rate cuts. I even had a reader email recently to tell me they’d had 1.25 per cent shaved off their home loan just by asking.
WALK TO A NEW DIGITAL LENDER
There is so much competition in the home loan market, particularly from the new online digital lenders, with many offering a variable mortgage rate under 3 per cent.
Because they don’t have expensive old technology and the costly branch networks of the big banks they can offer a better rate but are still monitored by the same regulators.
Many Australians are switching their mortgage to these new lenders but keeping their transaction accounts, online banking and credit cards with the old bank.
Originally published as Kochie: How to cut your mortgage