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Have to say I am in a GLORIOUS mood today.
Because, finally, for once… the sun is out.
And we can ALL enjoy our weekend proper.
The way it should be 🙂
Before I can though, I have to let y’all in on a secret.
It’s something which has been bugging me for a while now.
I see it every day, invisible to most of us.
What is it?
I’m talking of course, about the hidden fees and charges in our home loans.
Now, for our international friends who are not as familiar with Australia, us Aussies – we are obsessed with real estate, whether that is to live in, invest in, or rent in.
In fact, the Great Australian Dream of home ownership even has its own Wikipedia page!
So really, it’s not a surprise that obtaining a home loan (mortgage), is a rite of passage for many Aussies.
BUT, there’s a bunch of greedy bastards who have preyed upon our fascination with property and the unsuspecting masses.
The lenders (banks) of course!
It’s pretty much daylight robbery.
Here, let me explain on the 4 ways that they do it.
Interest Rate Adjustments
For those of us who have taken out loans in the last few years, we’ve been fortunate that the Reserve Bank (RBA) has been cutting rates at the same time.
Here’s the official cash rate trend…
That means if you’re on a variable rate, the rate has been reducing as well.
But have you noticed recently that it doesn’t reduce in lock-step with the RBA rate cuts?
If the RBA cuts rates by 0.25%… the lenders don’t pass on 0.25% do they? Nope, they don’t.
They pass on 0.15%, 0.19%, 0.23%… whatever it is, it always seems just shy of the 0.25%.
This is because of something called “cost of funding“.
Which in simple form, is the cost that the lenders themselves have to pay to borrow funds to then lend to you.
That’s partly the reason, although my cynical view is:
When the RBA cuts rates, it’s a great opportunity to improve net interest margins, which then turns into net profit, which turns into an increase in the share price, which means more bonuses for those at the top. Win-win-win all round.
And for those of you who wonder what will happen when the RBA increases rates?
I’ll go on record and say that you’ll be seeing 0.25% increases EVERY. SINGLE. TIME.
What to do?
You can’t do that much, I mean, unless you start your own bank or become a private lender.
For those of us who aren’t blessed with billions or aren’t in the criminal underworld – there’s always refinancing to look for a cheaper rate.
Advertised Rates for New Customers Only.
Yeah… this one is a big bug bear.
The lenders tempt new customers with brand new shiny rates…
I can’t count how many times I’ve tried to re-negotiate my existing loan rates by quoting advertised rates… only to be told, these rates are available to new customers only.
It’s actually a common practice in the finance industry, even the RBA talks about it.
According to them, this “loyalty tax” costs existing borrowers (us) around 0.4% higher than new borrowers.
Which means on a loan balance of $250,000, equates to a difference of $1,000 of extra interest payments.
But if you live in Sydney or Melbourne… chances are your mortgage is much higher than $250,000.
What to do?
Now I know, there’s many things in life you should be loyal to… your partner, your family, your country, Vietnamese pork rolls… Ice cream… um. That’s about it.
Suffice to say, your lender is not one of them.
What I’ve done though (apart from refinancing), is to contact prospective lenders directly, and pretend to be an existing borrower… to see whether I am eligible for a lower advertised rate.
If it’s no, I just move onto the next one.
Fees, Fees, Fees.
Oh boy, this one really riles me up.
People think that a lower rate equals a better deal.
There’s SO much more that adds up:
Application fees, annual package fees, early exit fees, early repayment fees, account maintenance fees, mortgage registration fees, mortgage discharge fees, mortgage statement fees… “runs out of breath”. And plenty more.
If there’s a fee out there, rest assured, you’ll catch it.
What to do?
Don’t compare on the interest rate, compare the comparison rate, which is the true cost of the loan (including fees + charges).
Usually it is higher than the advertised rate, because of the extra fees and charges.
A lower advertised rate but a higher comparison rate is just sneaky marketing.
30 Year Resets
This one I found out very recently, as it’s not as common as the other ones.
Basically, when you refinance, you’ll be offered another 30 year loan term.
The trick is though, you don’t have to take out another 30 years.
Because if you do, you’ll most likely end up paying much more than the initial term.
This is best illustrated with the following example:
Let’s say today (16th Feb) you take out a $300,000 loan, at 4% interest rate, over 30 years.
Using an excel calculator – your monthly repayment is $1,432.25 per month.
Your total interest payments are $215,608.52 so you’d have paid $515,608.52 over the life of the loan.
Now let’s say you’ve paid it down to $250,000 at 3.5% interest rate over 30 years.
So you’ve now reduced your monthly repayments to $1,122.61, and you’ll pay interest of $154,140.22 so it’d be $404,140.22.
But what about the $50k you paid off?
Back to our excel calculator…
For those who aren’t as visually inclined… this means that to paydown the original loan of $300,000 to $250,000, occurs sometime in May 2028.
You’d have made 99 monthly repayments, totalling $141,792.34.
So add up $141,792.34 + $404,140.22 = $545,932.56
Which means you are $545,932.56 – $515,608.52 = $30,324.04 WORSE OFF than if you had stayed on a higher rate!!!
Actually not mind blown.
This is just how compound interest works.
The lenders just understand it better.
What to do?
When you refinance, you can insist on the same loan term outstanding as the previous one.
So if you only have 22 years and 5 months left on your old loan, refinance at 22 years and 5 months.
But there’s a simpler solution.
Just pay more than your required minimum repayment each cycle. An extra $100/month really adds up.
Also, you don’t have to pay monthly either.
This is how much you pay if you change the cycle to fortnightly (without extra repayments):
And my favourite, weekly repayments (without extra repayments):
It’s just a numbers game after all – why not make it work for you?
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