Ever wondered – ‘there’s got to be a better way to manage my mortgage?’ Well by following this top 4 must have loan features guide you could be on your way to paying off your mortgage fast!
As a general rule with Home Loan Packages, the lower the interest rate offered the less features provided conversely the higher the interest rate provided the more features offered. How successful you will be in paying off your loan earlier is largely dependent on the type of loan you have and the frequency of additional repayments you make!
There are some so called debt advice specialists still preaching mortgage minimisation programs to the unweary and those under financial stress by charging thousands of dollars to join their schemes whilst promising to save thousands of dollars off the average mortgage.
If anyone is offering their services to show you how to save thousands of dollars in interest by charging you thousands … RUN!!
One thing is for sure, there are no sure way fast rules and no secret formulas in paying off a mortgage fast. The aim is simply to get the right balance; a loan product must offer a competitive interest rate and fee waivers if at all possible!
The following is the 4 loan feature pillar test that should be used as a benchmark when comparing a home loan package product.
These features are critical to boost your success in paying off your mortgage sooner.
1. Lifetime interest rate discount
Must offer a lower interest rate than the average market variable rate (lender offering a discount off their bench mark variable rate and fixed rates) –
Most lenders these days will offer an interest rate discount off either their variable rate and in some cases also off their fixed rates: Interest rates play a huge part in determining how soon you will pay off your mortgage. You can actually score some reasonable loan packages offering anything from 0.5% to 0.75% or higher off the variable rate; on an average loan of $240,000 with a 0.5% discount could save you around $25,000 in interest over a 25 year term and if you make your repayments fortnightly instead of monthly (Paying your mortgage fortnightly will equate to you making 13 monthly repayments instead of 12 annually) you will save a further $97,000 in interest – a saving of over $120,000 by simply negotiating with your lender for a better rate with added loan repayment flexibility.
You could probably score an even larger discount if your loan amount is usually over five hundred thousand. Most lenders will consider your proposal especially if you have been a good long standing customer.
Don’t forget to ask about the comparison rate. Always look at the comparison rate when benchmarking loans; it represents a measure showing the true cost of a home loan product (all lenders must disclose respective comparison rates in all their home loan product range in all their advertising) to reflect all the annual interest payments and fees, showing the summation of the costs as a single percentage figure. For example, a lender may advertise a rate of 8.42 per cent, however its comparison rate at 9.10 per cent.
The comparison rate does however have its limitations as it does not take into account all fees and charges such as redraw fees or early repayment fees, and cost savings such as fee waivers.
If the comparison rate is substantially higher than the rate offered it simply means that you have to further negotiate the fee structure of the loan being offered.
2. Must be up-front Price efficient
Price is a one-time event – provide waiver of up-front fees such as establishment fee, valuation fee and a settlement fee.
Start up fees can at times add up to around a thousand dollars in banking fees so obviously if the lender is offering to waive all or some of the start up costs it puts you in a very good footing. A loan must be viewed for its interest rate and features offerings such as the nature of the true ongoing cost.
Imagine by placing that initial one thousand dollars waived by the lender in up-front fees straight back into your mortgage as an additional loan repayment can save you around $1,700 in interest when factored over a 25 year term on an average loan on a $240,000 loan. Remember interest saved is money earned!
3. Must be on-going Cost efficient
Cost is a re-occurring sequence – Once you become successful in negotiating a better rate – what next? What is the key differentiator? The fee structure and flexibility of a mortgage loan is just as important as the actual interest rate!
A loan package must be costs efficient; provide waiver of the annual package fee and monthly account keeping fees, variation and future loan increase fee and all fees for withdrawals at ATM's [no matter which bank's ATM machine you use], provide free; EFTPOS transactions in Australia, personal cheque withdrawals, cash or cheque deposits at Australia Post, BPay and Periodical Payments to another financial institution.
Many lenders these days charge a legal fee or commonly known as a conveyancing fee as they employ external solicitors to produce mortgage documents and attend settlement; as this is an outsourced service it is almost impossible to negotiate its waiver. A small price to pay for the right loan!
It’s amazing to see how many people are fixated by paying a 10 point higher rate than the next lender however, fail to realize that they might already have a loan facility that is offering a lower fee structure with more flexible features and yet have formed tunnel vision thinking that the interest rate is the only thing to consider and fail to negotiate the on-going fee structure.
The fee structure such as ongoing management fees and future increase and variation and product switch fees also play a major part!
Remember the lower the interest rate offered the more restrictive the loan product and hence the less the chance of you paying your mortgage sooner.
The fee structure is CRITICAL: this is the true measure of an efficient Home Loan Package. Basically lenders use gimmicks such as advertising special rate discounts and promotional offers waiving establishment fees and other up-front fees, introductory rates, honey moon rates; these tactics are designed to attract new customers – what consumers fail to realise is that these promotional offers have an expiry date usually twelve months then the loan eventually reverts to a more expensive facility.
The main profits for the lenders are made from transactional accounts such as loans offering full transactional features – however some lenders do provide transaction fee waivers and discounted interest rates. It’s just a matter of finding them!
A loan account that offers transactional fee waivers can translate to thousands of dollars in interest savings over the term of the loan.
4. Loan flexibility
By implementing loan features such as; redraw of your credit funds, direct debit facilities, loan portability, flexibility of repayment options, salary crediting, free transactional full offset account, internet banking, BPay, with the option to split the loan into sub-accounts at no extra cost. The loan must offer the facility of making additional and more regular repayments with no penalty fees; by simply paying an additional $100 more per month on your mortgage could save you around $70,000 over the loan term on a average loan of $240,000 over 25 years.
Most people these days take on a mortgage spread over a 30 year term: that’s a good thing as you are obligated to the lender for the minimum repayment under contract so it gives you the chance to keep the loan repayments as low as possible during the early stages - the longer the term the lower the repayments.
However you need to be mindful that the longer the term the more interest you will pay over the life of the loan as compared to say a 20 or 25 year term. With that in mind it is imperative to budget for making additional repayments over each month. You could take your loan over a 30 year term however instruct the lender to base the repayments spread over a 25 year term. This means that you will pay less interest over the life of the loan whilst having the safety net of reducing your repayments at times of increasing interest rates.
One of the most innovative loan features ever developed is an offset deposit account.
The offset account is a facility whereby it links the variable rate loan with an offset deposit account, so that every dollar you hold in your deposit account effectively reduces the amount of interest you pay on your loan as the interest is calculated on the remaining balance after the funds from the deposit account are. Basically the offset account delivers comparable results as if you making additional repayments.
The most powerful cocktail is by combining salary crediting (your employer credits your salary into the deposit offset account) with a deposit offset account – this process acts as a catalyst and helps minimise your loan balance every pay cycle so that the interest charged will be applied to the fluctuating balance which results in a lower monthly interest bill.
For example; based on an $80,000 annual income credited into an offset account linked to a variable loan of $240,000 with a rate of 9.50% the following phenomenon would occur:
Total interest due over a 25 year term is approximately $405,000
Affecting a deposit offset account facility would save you around $220,000 in interest and reduces the term from 25 years down to 13 years.
Remember that an offset account will only work if you have surplus cash flow in the account every pay cycle!
These loan features when used in a structured strategy can make a substantial difference in the amount of interest you pay and ultimately how fast you pay off your mortgage!
When considering a new loan it is very important that you must not look at a Home Loan for short term funding such as below 5 years as the discharge fees and deferred establishment fees are very high with most all lenders!
Lenders tend to work their profit budget spread over the first 5 years of the mortgage term any consideration of a term less than 5 years will impact on your ability to repay out your loan early due to the early repayment fees.
In the event that your current home loan does not have features discussed above it might be worth while considering refinancing with a product that is flexible and offers you with all the money saving features.
Does your current loan product meet with the 4 pillar test?
Do you have a query relating to financial matters? Simply contact the Finance Coach!