Put your mortgage on a diet
The first in an occasional series of ideas for reducing your mortgage.
Friday, August 27th 1999, 12:00AM
by Paul McBeth
Save your way to financial freedom, get the mortgage monkey off your back...just a couple of phrases we've seen recently entreating people to sign up with mortgage reduction companies.
One Good Returns reader told us that such a firm wanted to charge her $4,500 to restructure her loan. They came up with a seven-year reduction in the loan term, but part of those savings came through tipping in her $10,000 term deposit (which made sense if it wasn't emergency money) and breaking an existing fixed rate loan (at a cost of $3,000 plus bank charges).
In the end, she decided not to go ahead and went to her bank to work out a better deal.
To give you a few ideas on how to put your own mortgage on a diet, here's the first in an occasional series. However, if some of your borrowing is tax deductible, it's a good idea to check first with your accountant or tax adviser before you do anything. (Interest on borrowings is tax-deductible if you've borrowed to generate income that's assessable for income tax. Two common examples are borrowing against your house to buy a business or taking out a mortgage on a rental property)
Take control of your mortgage: shop around
We can't say this too often. Either use a reputable mortgage broker or get organised yourself to find the best deal. Don't forget the direct banks and non-bank mortgage lenders.
Having said that, you'll need to take into account more than just the interest rate if you're planning to switch. Work out all the other costs (establishment fees, charges for setting up new accounts, valuations, break costs on any existing fixed rate loans and so on). Does the lender offer all the products you want, such as revolving credit facilities? If you're getting other deals such as reduced transaction costs with your existing lender, how much is this worth?
Why bother?
Because even a small difference in the interest rate has an impact. In Martin Hawes' latest book on mortgages, he gives the example of a $120,000 loan over 25 years.
If one lender offers you an interest rate of 5.5 per cent (and assuming the rate stays the same), you'll pay back $81,313 in interest. Take the same loan at 6.5 per cent and you'll pay back $123,075. It's cost you an extra $41,762 in interest - and remember you only borrowed $120,000 to start with.
Hawes claims that it's completely feasible to manage your mortgage over its term to get a one per cent reduction, both by looking at alternative lenders and by the use of fixed rates. He says that even smaller differentials are worth fighting for.
Pay back principal early
At the start of a table loan, each repayment is mostly interest and hardly any principal. So, if you've got any spare cash at all or money sitting around deposit (our reader's $10,000 would do nicely!), see if you're able to pay off some of the principal sooner rather than later. It can have a surprising effect on your total interest bill (ask your mortgage lender to work it out for you).
The flipside of this is avoiding mortgage honeymoons and holidays. It all means that the interest bill is stacking up in your absence and - the ultimate horror - you're starting to pay interest on the interest.
Earlier stories:
Counting the cost of mortgage holidays
Cutting your mortgage costs