From Money Manager
1. Add up those home loan fees
Once you've saved up the deposit for a home, don't forget to take into account all the extra fees that come with buying a house - some or all of these: stamp duty, legal costs, disbursements, mortgage insurance, pest inspection report, survey report, builder's report, strata inspection report, loan application fee, valuation fee, registration fee, sundry fees like refinancing or switching fees.
On a mortgage loan of $300,000, expect to pay at least $15,000 in fees. With mortgage insurance, this will rise to about $17,470.
2. Additional repayments
Making additional repayments beyond what's required in your minimum monthly repayment is one of the best ways to reduce the total interest paid and term of your loan.
As a rule of thumb, every $1 in extra repayments you make early in the life of your loan saves around $2 in interest over the term of the loan, depending on the level of interest rates.
Consider either one-off lump sum payments when you have spare cash or commit to increasing your regular repayment amount.
However, make sure that your loan allows you to make additional repayments without penalty. Fixed-rate and basic (or 'no-frills' loans) often have restrictions on extra repayments or charge a fee for the privilege.
3. Ask about 'professional package' discounts
If you're earning more than $50,000 a year, or $80,000 or more with a partner, ask lenders and brokers about the "professional packages". The home loan interest rate is usually discounted by 0.5 per cent on which ever loan you choose. Relationship discounts are also available from banks and credit unions for those borrowers who consolidate a range of banking business with the one institution. Home loan discounts, savings account fee waivers and credit card annual fee waivers are commonly offered.
4. Be careful of 'honeymoon' intro rates
Home lenders entice borrowers to their home loans with attractive low introductory rates. These rates may be up to 2 percentage points below the standard rates for home loans and look therefore look very attractive. But Infochoice analysis shows otherwise. "Honeymoon rates" only last for six months to a year before automatically reverting to the standard rate offered by that lender. The 'comparison rate' that lenders must publish for each loan is a much better tool with which to compare the true interest and fees costs of different loans. Infochoice's Australian Mortgage Report in 2004 found that the lower the introductory rate, the more costly the loan turned out to be over time.
By all means take advantage of these discounted rates but don't let them dictate your choice of loan. Compare loans on the basis of their true cost over time and on the basis of flexibility and features important to you.
5. Beware fixed rates
Attractive when interest rates are rising, fixed-rate loans also lock you in for a fixed term and as such are less flexible than variable-rate loans. You may not be able to make additional repayments or pay the loan out early without facing high penalty charges.
Fixed rate loans suit borrowers who really value the certainty of knowing exactly what their future repayments will be - property investors and borrowers on a tight budget, for example.
Borrowers trying to beat rate rises by picking the right time to lock in to a fixed rate are playing a risky game. Such borrowers are taking a gamble on the future and the longer the period you fix, the more of a gamble it is. Predicting interest rates three to fives years into the future is something akin to picking Lotto numbers.
Use our
Split-loan simulator to compare repayments and total interest under different fixed and variable rate scenarios.
6. Can't get a standard loan? There are alternatives
If the banks, building societies and credit unions won't lend to you because you're self employed, newly arrived in the country or have a poor credit history, consider the booming non-conforming and "low doc" loan market. A number of non-bank lenders offer loans which especially cater for this type of borrower. The interest rates on non-conforming loans are generally higher but come down after a few years of on-time repayments.
7. Check if there are ongoing fees
Many banks now charge monthly or annual administration fees on home loans. When comparing the cost of different loans, don't just look at the interest rate, look at the 'total cost of borrowing'.
Many lenders are using 'average annual percentage rates' (AAPRs) as a means of comparing the true or total cost of loans. Although this measure incorporates fees as well as the interest rate, they can be misleading because an AAPR will vary on a particular loan depending on the amount borrowed.
8. Check your statements for errors
There are claims that more than 50 percent of home loan statements contain calculation errors. Simple mistakes, like the entry of the incorrect balance or the application of the wrong interest rate at the wrong time can be costly and mostly favour the lender. We all make mistakes, even bank computers make them and that's why borrowers should keep a close eye on loan statements. Various software for your home PC is available that can run a check on your statements.
9. Compare loan features, not just rates
The more flexible the loan, the higher interest you'll pay. A variable loan which allows you to draw against repayments or offset savings against the mortgage will have a higher rate than a basic loan. Always compare loans with the same features when looking for the best interest rate.
10. Consider a portable loan
A portable home loan allows you to sell one property and move to a new one without having to refinance, ie. pay out the old loan and take out a new one. This saves application and legal fees.
Most lenders will insist that the loan amount required for the new property is no greater than the existing amount borrowed.
11. Do you need a redraw facility?
A redraw facility allows you to make additional repayments on your mortgage, and then have access to the additional repayments if you need to.
However, the facility is normally only available on "Standard Variable" loans, which are more expensive than basic variable loans. Before you choose the more expensive loan, make sure you understand the conditions attached to the redraw facility as it may include a minimum amount and a fee every time you use it.
12. Do your homework
There are so many home loans on the market these days with an increasing variety of rates, fees and features that it really pays to shop around. Our
home loan selector is designed to make comparing what's on offer much easier.
13. Don't compare against the so-called 'standard variable rate'
Don't allow any lender, bank or non-bank, to tell you you're getting a good interest rate because it's lower than the banks' standard variable rate (SVR). The SVR of the major banks has ceased to become a meaningful yardstick. Its not the typical rate paid by Australian borrowers, far from it. We estimate that at any one time less than 10 per cent of borrowers are paying the prevailing bank standard variable rate.
Infochoice analysis shows the true benchmark variable rate is 0.5 per cent lower than the bank SVR. It's not just that the plethora of non-bank lenders undercut the banks. Even the banks themselves hardly ever lend at that rate. Anyone borrowing more than $250,000 will be offered a professional package of discounts which cuts the SVR by 0.5 to 0.7 per cent for the life of the loan. The SVR minus 0.5 per cent, that's your market average for comparing loans when shopping around.
14. Don't fall foul of the taxman
If you're an investor in rental property, take a note of these common problem areas the ATO finds with deduction claims. Legal fees are only deductible if they're associated with taking out a loan to buy property - not for the actual purchase.
These fees can be claimed along with other borrowing costs but not in the year of purchase. They must be depreciated over the life of the loan. Another deduction scrutinised by the Tax Office is depreciation, relatively easy to calculate for new properties but harder for established homes. Investors may try to determine these on their own but can pay a quantity surveyor to do it. This usually costs at least $500 but often results in a higher depreciation claim.
The other area targeted in ATO audits is travel expenses associated with rental properties. Travel claims are allowed for the investor to do repairs, collect rent or carry out inspections. The property does not have to be interstate. A yearly per-kilometre claim can be made no matter where the property is.
15. Don't rely solely on comparison rates
All lenders must now include "comparison rates" in advertisements for their home loans and personal loans to help consumers get a feel for their total cost - fees and the interest. Don't rely solely on comparison rates when choosing a loan and beware of their shortcomings. They only take into account fees and interest rates, not the features and how suitable the loan is for your circumstances.
16. Ensure your mortgage broker really delivers
Getting a broker to arrange your loan can certainly save a lot of time and hassle, but borrowers really must ensure the service they expect is the one that's delivered. Ensure the broker fully explains in writing why his or her loan recommendation is the best for your circumstances, not just the loan that earns the most for the broker. Ensure brokers also fully outline all upfront and ongoing "trail" commissions they will earn from lenders for your loan business. Never pay a broker a fee yourself unless the broker is prepared to rebate some or all of their commission earnings to you in return.
17. Keep accurate records
Keep accurate records of your deposits and ATM transactions. It is also wise to keep copies of your loan application and approval documents in a safe place.
This is the best way to avoid hefty fees which may be charged by a bank when its customers want to see copies of their cheques or loan files.
18. Look beyond the banks
Get a feel for what's on offer across the wide range of financial providers around these days. Credit unions, building societies, mortgage originators, community banks and boutique online or telephone banks may offer better interest rates or lower fees than the big banks because they are anxious to win new business or they are non-profit organisations.
19. Look for flexibility
When taking out a loan make sure it offers the flexibility to meet the changing circumstances you will undoubtedly experience over the 10 to 25 years of your loan. The ability to make extra repayments, redraw extra repayments, fix the rate on a portion of the loan, or refinance to another loan if need be are all features to be considered.
Most fixed term and rate loans and some basic loans don't allow you to make additional repayments, or charge a penalty for doing so. Make sure you understand the terms and conditions before taking out your loan.
20. Look out for 'deferred establishment fees'
Home loan borrowers should watch out particularly for the big sting from "deferred establishment fees" which come into play these days if you leave a variable home loan early, typically within the first 3-5 years. They can be as large as the break costs on a fixed term loan and run into thousands. Most borrowers don't expect to change their loan in the first few years, but the fact is that the average life of a home loan is now very short - as low as 20 months.
21. Make the most of rate falls
If monthly repayments drop because interest rates have fallen, try to maintain the old repayment levels. This means you will pay off more of the principal with each repayment, reduce the term of your loan and the total amount of interest paid.
22. Make your surplus cash work harder
Use cash savings to help pay off your loan quicker. Remember the old saying 'a dollar saved is a dollar earned'? If you have a home loan at 7 per cent, every extra dollar you pay off the principal is another dollar you are not paying 7 per cent on each year. If you instead put that extra dollar into a savings account you are only going to earn 2 or 3, perhaps 5 per cent at the most. Therefore putting savings into your loan earns you twice as much as a savings account.
These days, redraw facilities available on most standard variable loans allow you to take back those extra payments if needed anyway. See also 'Offset accounts and all-in-one loans' below.
23. Pay your loan off quicker with fortnightly or weekly repayments
Dividing your minimum monthly repayment into two fortnightly or four weekly payments can reduce the term of your loan in two ways:
- because there are more than two fortnights or four weeks in every month, dividing your original monthly repayment into two or four means you actually pay more over the course of a calendar month.
- when interest is calculated daily, the more frequent repayments result in less interest being charged to your loan over the course of a month.
But watch out. If requesting fortnightly or weekly repayments, make sure you specifically ask your lender to halve or quarter the monthly repayment. Unless you ask them, many lenders these days will just calculate the more frequent repayment on the basis of the minimum required fortnightly or weekly repayment, delivering very little extra repayment advantage.
24. Quit smoking
If you smoke a pack of cigarettes a day, it is costing you almost $3000 a year. Quit, and put the daily saving of $8 or so aside and pay an extra $240 each month off your mortgage.
Use our
Extra repayments calculator to see how much you can save and how quickly you'll repay the mortgage (but it won't tell you how much longer you will live as a result).
25. Save interest with offset accounts
Offset accounts not only save you home loan interest, they help beat the taxman as well. Savings in offset accounts are subtracted from the outstanding loan amount each month so interest is charged only the net amount. Interest paid in cash to your savings account is taxable, but the same interest used to offset home loan interest is not - a tax effective way to reduce you home loan. However, to get the most from an offset account, look for accounts which offers a 'full offset', ie. paying interest at the same rate charged on your home loan. Redraw facilities and line-of-credit loans make use of your savings in much the same way.
26. Save with a line-of-credit loan
Disciplined borrowers can make use of the increasing range of line-of-credit loans, also called salary account or all-in-one loans, which offer the chance to make every spare dollar work to reduce your home loan. These loans allow your income to be paid directly into the loan account to reduce the loan outstanding sooner than waiting for the repayment due date. You are also effectively making larger repayments because you only withdraw the money you need to live on each month, leaving all surplus cash in the loan account to reduce the balance. In this way, the loan can be paid off much quicker and thousands in interest saved. Line-of-credit borrowers must be disciplined, however, and not withdraw more money over time than is going in. Income you bank must exceed your total expenses by at least the value of your principal-and-interest loan repayment before there is any financial benefit.
27. Use your home equity to borrow
The more you pay off your home loan, the more of the property you own or the more 'equity' in the property you build up. With a more flexible banking system these days, it is possible to borrow against this equity for further investment; a second property, shares etc. The advantage of borrowing against this equity rather than taking out a personal, investment or business loan is that the interest rate will invariably be lower - the better the asset you put up as collateral, the better the terms a lender will offer. Nothing beats bricks and mortar security (in this case, your home).
28. Win rate discounts for bulk business
It's possible to get home loans with interest rates discounted by up to half a percentage point lower than the standard variable rate. The big banks and some smaller lenders offer a package of discounts and bonuses to those who conduct all their banking with them. These packages require a minimum loan of $150,000 -$250,00, using the lender's credit card, opening a transaction account, and having an above-average income. An annual fee for the package may apply. Borrowers can save nearly $19,000 in interest on a $200,000 loan over 25 years if the rate is cut from 7.07 per cent to 6.57 per cent. This will reduce monthly repayments by $63 and borrowers can save more than $25,000 in interest if the monthly $63 saving gets put towards the loan at the lower interest rate. The package may also include fee-free banking and discounts on products such as margin loans, insurance and personal loans. The packages are generally not promoted actively: the customer has to seek them out.
Posts
