With interest rates coming down, mortgage holders coming off higher rates will be breathing a sigh of relief.  It will be tempting to go for the lowest interest rate when it comes time to refix.  This was the case 5 years ago when interest rates were somewhere between early 2s and late 2s.  With hindsight we all know what we should have done. 

It’s an important time to pause and review your situation and look at what’s going on in the market. Market indicators such as yield curves and swap rates are good indicators of what is expected to happen.  Expected, doesn’t always come to fruition.  This is especially true when you have the orange roughie tweeting away!

It makes it harder when you have no idea what swap rates and yield curves are.  We won’t bore you with the detail, but they provide good background information about where interest rates have been and where they are expected to head.  It’s the best information available to help you make a decision along with looking at commentaries from economists. Other things to consider:
 
Coming off a Higher Rate

A $500,000 home loan fixed at 6% has a weekly payment of $692 which will pay the loan off over 30 years.  Total interest cost $578,452.

If your interest rate drops from 6% to 5% and you keep your repayments at $692 your total interest cost drops to $354,408.  That’s a $224,044 saving over the life of the loan.  It also means you pay your loan off 5 years faster. 
That’s huge!

But wait there’s more.

If you then save that $692 per week into an investment account returning 5% per annum you’ll have $203,670 at the end of the original 30 year mortgage term.

Wow! What just happened?  It’s not magic.  It’s how compound interest works.  Time is your friend.

Making a Lump Sum Payment

When your fixed rate is expiring, this is the time to make a lump sum payment. 

While you are on a fixed rate, making a lump sum payment can incur penalties.  Banks have different allowances for making lump sums and it also depends on what is going on in the market.  If interest rates are lower than your current rate, there are likely to be penalties.

However, like in the examples above making lump sum payments can take significant time off your mortgage term and reduce the overall interest you pay.

Review Structure
Things can change while you are on a fixed rate.  You can change jobs, move into self-employment, change relationship status, establish some savings.

Simply refixing can mean you miss out on strategies to reduce your mortgage and save.  Some banks offer Offset home loans, others don’t.  This can be a great way to reduce your mortgage, especially if you are self employed and set money aside for tax.

It can be a great time to change banks to utilise a different product your current bank doesn’t offer.  Sometimes, it just comes down to cash.  There may be a better rate or cash incentive that will make a material difference to move banks.
 
Split Lending

Split lending refers to having your home lending split across different lenders.  This can be very inconvenient.  However, it can be worthwhile if you have a project in mind that may require a specialist lender.  For example, you’re looking to subdivide, or getting into trading properties.  This is only relevant if you have multiple properties to offer as security and want to make the most of bank interest rates while at the same time, using another lender’s credit criteria that suits your needs.
 
What should you do?
Start the process of a review at least 60 days before you are due to refix.  If you have to move banks, its currently taking some banks three weeks to approve lending and two weeks to document and settle. 

Move past focusing on the rate.  Ensure you check in with your Adviser and be generous with the information you share.  Afterall, it could save you hundreds of thousands of dollars!
 
 
Disclaimer: This newsletter is meant to be informative and engaging, hopefully not a cure for insomnia.  Please don't take this as personalised financial advice.  Discuss your situation with an Advisor.  This is where I need to say past returns are no guarantee of future returns.