Time to start looking seriously at how you can stay a few steps ahead of the Reserve.
While the Reserve Bank kept its official cash rate steady this month, some economists say the RBA could move higher four times in the next 12 months and life rates up to 1 percentage point higher.
On a $250,000 variable home loan with a 30-year term, a rise from 7 per cent to 8 per cent would add about $170 to monthly repayments.
You’d pay nearly $62,000 more in interest over the loan’s life. On a $400,000 loan, that 1 percentage point rise would mean an extra $275 a month and nearly $100,000 more in total interest. But there are several ways to save as much as 1 percentage point so you’re a few steps ahead of the RBA.
FIX YOUR RATE
There’s a window of opportunity to switch from a variable rate to a fixed rate before either rises again, says the chief executive of comparison website RateCity, Damian Smith.
The average three-year fixed rate is currently 7.41 per cent, just 0.3 of a percentage point higher than the average variable rate of 7.11 per cent, he says. “So if variable interest rates rise by 1 percentage point quickly, you’ll save 0.7 per cent in interest” by locking in now. Smith does note that for every month variable rates don’t rise, you’re worse off by fixing. But bear in mind that these are averages and you may be able to secure an even lower fixed rate.
HSBC, for instance, has a fixed rate of 6.89 per cent, which is below some variable rates.
While RateCity estimates the average variable rate is 7.1 per cent, you could be paying more than that. The researcher’s database shows variable rates as high as 8.73 per cent. See: www.ratecity.com.au/home-loans/search.
If so, it’s time to negotiate with your lender or start shopping around. Aussie Home Loans says the average of the big four banks’ advertised standard variable rates is 7.78 per cent, about 0.8 of a percentage point above its new Optimizer home loan rate of 6.99 per cent while NAB’s UBank this week announced a 6.59 per cent rate available until June 30 and by online application only.
Speed up your repayments and the interest savings could outweigh the damage from future rate rises. There are a few ways to do this.
The first is to take your monthly repayment, halve it, and then pay that amount fortnightly. Let’s say your monthly repayment is $3000. Paid 12 times a year, that comes to $36,000. Pay $1500 every fortnight instead and you’ll clear $39,000.
“Paying this way means you’ll make more repayments as there are 26 fortnights in a year,” says the finance writer with consumer group Choice, Brendan Mays. On a $250,000 loan at 7.5 per cent interest, paying fortnightly can knock four years and nine months off the life of your loan, Mays estimates, saving more than $67,000 in interest.
Alternatively, you could top up your required mortgage repayment, Smith says. If you start paying that $170 a month extra off a $250,000 loan now, you’ll be building a buffer and if your rate does rise from 7.1 per cent to 8.1 per cent, you won’t have to change your cash flow.
The chief executive of Resi Home Loans, Lisa Montgomery, says you might not be able to secure a full 1 per cent reduction on your rate but you might be able to achieve the effect through a combination of steps.
Her suggestion is to consolidate any high-interest debt – on credit cards, say – into your lower-interest home loan, eliminating the interest you were paying there. Then redirect all the money you were paying on that debt to your mortgage. In addition, refinance your loan from, say, 7.5 per cent to 7 per cent but keep making repayments as if the higher rate still applied and start paying fortnightly. On a $250,000 loan, repayments at 7.5 per cent would be $1748 a month. Refinance at 7 per cent and $1663 is required. But pay half of the higher repayment fortnightly ($874) and you’ll shave nearly nine years and $120,811 in interest off the loan.
Save a bigger deposit for a discount
If you don’t have a home loan yet, consider saving a bigger deposit. Not just because a smaller loan means less interest but because lenders are starting to offer discounts to people with more backing.
”We’re seeing a shift in thinking by lenders who are trying to attract low-risk customers by offering an even bigger discount for people who don’t borrow up to the hilt,” an analyst for Canstar Cannex, Mitchell Watson, says. Twelve months ago, the more you borrowed, the bigger the discount, he says.
But now, some lenders are offering discounts to people with loan-to-value ratios (LVR) of 75 per cent or less – in other words, those who have a 25 per cent deposit.
NAB’s Homeside dropped the rate down 0.1 of a percentage point if you have an LVR between 75 per cent and 90 per cent (a deposit of 10 per cent to 25 per cent) and a further 0.1 per cent if it’s below 75 per cent.
The Commonwealth Bank offers 0.05 of a percentage point off the usual Wealth Package rate for an LVR below 75 per cent.