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With big banks hiking their popular shorter term fixed mortgage rates again last week, experts say now is the time for borrowers to negotiate over rates and payment methods.
Just a small change in interest rate can make an enormous difference to the cost of a loan long-term, and shopping around or haggling with your mortgage provider could drop your loan rate 0.2 or 0.4 per cent.
Finance author Martin Hawes says people should negotiate with lenders - make them want your business and work for it, he says.
A bank is a business like any other. Customers are entitled to try to negotiate down the interest rate and any other costs as far as possible, especially if you've got a relatively low loan-to-value ratio (LVR) and plenty of cash flow.
Competition is fierce between lenders. Westpac's Craig Dowling says banks have some flexibility on rates. They want long-term relationships with their customers, so highlight the length and nature of your relationship with the bank and the business that you've brought to it.
If you emphasise you are committed to being a loyal customer, the bank is likely to consider a request for a lower rate.
All banks are aware of the rates available and may be willing to match a competitor's short-term special, if you ask, to retain you.
You may also be able to negotiate reduced or no transaction fees for your other bank accounts.
Review your mortgage when there are any major changes to your financial situation, such as a pay rise or a new budget.
A mortgage is not something you set and forget, says Hawes. It's likely to be your biggest financial commitment and there is plenty of scope to save money on it.
Borrowing against your house for other things should be restricted to buying another income-producing asset, such as an investment property, but not to fund consumption, he says.
If you have accumulated high-interest debts, such as credit cards and hire purchases, they are likely to be putting pressure on your cash flow. In that case, general manager of financial consultancy enableMe, Sam Beijani, says consolidating them against your mortgage is a good idea because it frees up your cash flow and switches your debts to a lower interest rate.
But this should only be done if you are committed to not overspending, otherwise you will find yourself in the same position six months down the track.
At that point, all you are doing is eating away at the equity in your home and effectively reducing your net wealth.
People struggling to make mortgage payments need to discuss the options with their lender.
Geoff Bawden, chairman of the Mortgage Brokers Association, says there are three main options for struggling homeowners before resorting to sale. He looks at their equity to see if there is room to take a "top up" on the loan and use that money to help service the borrowing while rates are high.
Mortgage "holidays" are available for up to three months once a year - then interest accrued is re-amortised into the loan.
However, Hawes says these options should be a last resort in today's market - you are getting further and further into debt while house prices are static and perhaps dropping. In these circumstances, you have a depreciating asset and an appreciating mortgage.
There may be the option of paying interest only for a period. This may be appropriate if your priority is staying in the house long term and you intend making a lump-sum payment or increasing repayments as soon as possible.
Mike Pero, of Mike Pero Mortgages, suggests extending the loan term if possible to reduce the monthly repayment. It then takes longer to pay off the loan, which means you pay more interest, but it may be a better option than falling behind on payments.
"If surplus household income is applied against the loan it can reduce the years that you are paying the mortgage, and this reduces the interest cost," says Pero.
People who have trouble making ends meet are often overspending and living beyond their means, says Beijani.
A budget makes this clear and allows them to realise where they tend to overspend. If they still have a deficit they should consider the fact they may have taken on too much debt, and may need to sell their home. They can rent for a while, which is cheaper than owning a home, and focus on getting back on their feet before buying another property.
Hawes agrees renting is a great bargain at the moment, and says prospective homebuyers shouldn't be in any rush. "The property slump will be deeper and last longer than what's been in the past. Use the time to amass as large a deposit as possible."
Nick McCorkindale, of Approved Mortgage Brokers, says you need a minimum 5 per cent deposit to get into a house in most cases. Low deposits often involve a low-equity fee, but he says these are negotiable and in most cases are not more than 1 per cent of the mortgage.
Dowling says those seeking mortgages should be honest with themselves and ensure they don't inflate income details or misrepresent true costs in the quest for a favourable outcome.
Although it can be demoralising if you have found what you think is your dream home, it is better to be turned down for a mortgage than to get one you can't afford. You may not think it at the time but the bank is doing you a favour, and sending you a message that would be dangerous to ignore. Be careful about going elsewhere for a mortgage in such circumstances. If you are not successful getting a mortgage for the amount you are seeking, it is best to reassess and make changes either to your financial situation or to your expectations. The bank will still be there when the time is right, says Dowling.
Interest rates are likely to stay high for a while, so Hawes says most people should be on a fixed rate in the one- to two-year bracket.
National Bank managing director Jenny Fagg suggests borrowers consider splitting their loan into smaller amounts, fixed for different terms, to avoid having to re-fix the whole amount at once in an unfavourable rate environment.
For some borrowers, having a revolving credit facility allows flexibility for increased repayments, and can be structured to manage interest rate risk with most of the loan amount on fixed-rate terms.
Hawes says usually 70-90 per cent of a mortgage should be on a fixed rate, but the optimum split between fixed rate mortgage and revolving credit depends on individual financial circumstances. Surplus household income in the revolving credit account can reduce the interest cost of the mortgage, and you can pay it down as much as you want without incurring a penalty.
But revolving credit facilities only suit people with the discipline not to draw on it for consumables.
It's a mistake to have a mortgage and cash in the bank - for example in a term deposit, says Hawes. The bank is borrowing your money, putting its margin on it and lending it back to you. If you get 8 per cent on a term deposit, it is taxed, coming down to about 5-6 per cent, but you're paying 9.5-11 per cent for the money the bank is lending. It is better to have an emergency fund of about three months' salary in a revolving credit facility that can be drawn if needed.
HOW TO PAY OFF YOUR MORTGAGE FASTER
You should always pay off a home mortgage as quickly as possible to minimise how much interest is paid to the bank.
As a rough rule of thumb, if a borrower takes the full 30 years to repay the mortgage, they will pay back almost four times what was borrowed - on a $350,000 mortgage, the borrower repays almost $1.1 million.
The quickest way to repay your mortgage is to have the structure optimised to suit your situation, while at the same time channelling all surplus income towards the mortgage.
EnableMe's Sam Beijani explains how it's done:
1. Spend the time doing a detailed budget. This allows you to realise what surplus income you have left (if any) between pay days. Often people will find they are spending more than what they are earning. If you do not have a surplus, or cannot get out of a deficit and into a surplus, you cannot repay your mortgage faster and should not be getting a mortgage. Cash flow is king and allows you to get ahead financially.
2. Analyse your budget. By doing a detailed budget, you should be able to understand your psychology of spending and the patterns by which you manage your daily finances. You can see where the weaknesses are, such as where you overspend, and address them by having a plan to reduce or better manage your spending. As we all pay our rent or mortgage, and we all pay our bills because we have to, what remains is discretionary spending. This is where most people lack the discipline and the boundaries, and that's why people often overspend. By analysing budgets, you will have more clarity around your finances and what surplus income you have. Once you are comfortable that you can maintain a certain level of surplus income, you move to the next step.
3. Optimise your daily accounts and your mortgage. The right account structure is the foundation for financial success. Having a good account structure means you maintain clarity around your daily spending, and this helps you better manage your money. Most people have too many accounts, making things so much more complicated that it works against efforts to not overspend. Once the account structure is in place, the mortgage must be optimised so the way it is structured suits your particular situation - and allows you to repay it as quickly as your surplus income will allow. An optimised mortgage structure should also have the flexibility to allow any extra income being channelled towards debt reduction to be re-accessed in the event of an emergency or unexpected expense.
4. Stick to your plan and be accountable. You can achieve your goal of paying off your mortgage faster when you stick to your plan, but this is easier said than done. We know people are four times more likely to achieve their goals when they are accountable to someone, such as a mentor or a coach. Enlist the help of an expert who will provide support, guidance and expert advice on a continuous basis, and who will make you accountable. Have a financial personal trainer.
