‘How to make three years’ salary in three days’

So, maybe the most appropriate story headline in this case is: “How to make three years’ salary in three days”.

The headline could equally be: “How to slash eight years off your loan… for free”.

Of course, you should not be paying the big four bank undiscounted mortgage interest rate anyway. So, if not even three years’ easy salary in the blink of an eye motivates you, simply call your major bank and ask for a rate discount. This is the best strategy if you do not think you would be approved for a new loan.

Loan serviceability hurdles are high. The financial regulator now insists that lenders apply three full percentage points on top of the headline borrowing rate, as a “stress test” on the amount you can borrow. For all the media scaremongering about possible home loan defaults after the official rate increase, because of this, recent borrowers may, in fact, be among the most prudent and protected.

There is also another compelling reason that it might not be viable for you to refinance: You have less than 20 per cent equity in your property. Without this, you will likely have to repay lenders’ mortgage insurance, an extortionate premium sometimes mounting to tens of thousands of dollars.

The insurance only protects the lender if you default, not you. It is a subject for another story, but it is ludicrous – in a market that needs to be competitive – that this insurance is not portable, so you can’t take it with you when you switch loan providers.

What about that rock-bottom mortgage interest rate of 1.85 per cent described above?

The accompanying table supplied by Mozo shows that rate is offered by Well Home Loans. I have highlighted this provider, as they offer the cheapest rate that is backed by an authorized deposit-taking institution (ADI). This means that a mortgage offset account that can be attached to your home loan – a powerful debt-reduction tool that can see you mortgage-free years early at no extra cost.

Only ADIs can take deposits, so lenders without this status may say they have an offset account, but really the mortgage is all-in-one, from which you need to make a redraw on the loan itself to get any cash back.

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Additional money sitting in redraw can be locked away by the lender if you get into financial strife. What’s more, a lender might simply re-calculate your balance and, essentially, suck up any extra repayments you may have made. (It’s in the fine print of your contract. Read it).

Note that the table of the cheapest variable interest rate mortgages supplied here are before any increases resulting from this week’s official rate rise are applied.

The big four banks have all indicated that they will pass on the full 25-basis-points Reserve Bank increase – on May 13 for ANZ and NAB, May 17 for Westpac and May 20 for Commonwealth Bank.

Other lenders typically follow suit, which implies the interest-saving opportunity endures.

If you are in a position to refinance, or simply to renegotiate your home loan, how can I say it any clearer: “Big four bank mortgages cost more”.

What home loan story will you choose?

  • Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me. Follow her on Facebook, Twitter or Instagram.

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