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The Downside to Low Interest Rates…. Have you fallen for this trap too?

interest rate cutsLow interest rates mean it’s likely you’re now paying less interets on your home loan than ever before.

And this is good news for you as a home owner, right?

Absolutely!

 

So how can there be a downside to low rates if it means you’re saving money?

We’re not going to talk about the long term economic effects of low interest rates – perhaps that’s a discussion for another day.

But what we want to talk about is a sense of complacency we see in borrowers, especially in a cycle of low rates.

Yes, your interest rate may be low and you’re able to cover your loan repayments nicely. That’s great news!… But it doesn’t mean you should just sit back and do nothing else.

You may even have a little bit extra left over at the end of each month now. Again, that’s great news!… But it doesn’t mean you should sit back and do nothing else.

Your responsibility to properly manage your household finances (specifically your home loan) remains, regardless of what interest rates are doing.

In fact, we’d argue that NOW is the time you need to get serious about getting your home loans sorted. Because NOW is the easiest time to get ahead.

It’s also what the majority of homeowners will NOT do.

And like most things in life, it’s the people who see opportunities for what they are – and then seek help from other to act on them – who will end up better off in the long run.

So, what are we actually talking about here?

 

What are some things you can do right NOW to leverage low interest rates?

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1. Pay more into your home loan

This is not a new concept. We all know that if we pay a little bit more into our mortgage each month, we’ll save money over the long run. But if you really knew how much you could save, would you be more inclined to do so?

If you’ve been in your home for a few years, it’s likely you were making higher repayments previously. So what if you continued to contribute that same amount into your loan now? If you chose to do this, you’ll certainly be ahead on your home loan. Because with each additional payment, helps to reduce the amount you owe and therefore reduces the amount of interest you incur.

If you’re a little late to the party on this, there’s no time like the present.

You don’t even need to ‘officially’ change your repayment amount with your lender. Just set up an automated transfer each week/ fortnight/ month into your loan, in addition to the normal repayment that’s deducted . That way (if you need to), you have the flexibility to cancel the additional payment anytime you like.

These are significant interest savings to be made here – even if you *only* decide to pay an additional $20/ week into your home loan.

The best news is that most of us wouldn’t need to change our lifestyles significantly to make that $20/ week payment.

It just requires a bit of a mindset shift and 5 minutes out of your day to actually set the automated payment. If $20 seems too much for you, just pick ANY amount you’re comfortable with.

The trick here is *actually* setting up the automatic payment. Because if it happens automatically, you won’t even think about it.

 

The best time to get ahead on your loans is whilst rates are low, because with each additional payment, you’re chipping away at the principal loan amount you owe. The idea being that when rates rise (eventually), you’ll have paid much more off your loan and rising interest rates will have little impact on you personally.

 

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2. Use an offset account effectively

Again, offset accounts are not a new concept, but they’re not always used effectively.

An offset account works like a normal bank account, but any money you have sitting in the account reduces the ‘net debt’ you owe. The interest you’re charged is then calculated from this ‘net debt’ amount. The more you have sitting in this offset account, the less interest you’re charged on your loan.

If you’re not sure how an offset account works, you can find out more here.

If you want to make sure you’re maximising the offset account you already have, make sure you read this.

 

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3. Convert to an Owner Occupied loan (and pay lower owner occupied interest rates)

We’ve helped thousands of clients buy property over the years and many of those clients have bought investment properties with a plan to one day move into. Sometimes it’s because they want to take time to sell their own place first. Other times they’ll buy an interstate property a year or two before they expect to move for a new job. And sometimes people will buy a ‘family home’ before they have a family, which may have a side benefit of being able to claim stamp duty taxation benefits. (Check with your accountant if this is something you’re thinking about too.)

Regardless, you need to remember to switch the loan over to an owner occupied loan once you finally move in to the property. Otherwise, you’ll continue to pay investment lending rates which tend to be higher.

Another prompt for this switch can be during a couple separation, where sometimes one party may move into the investment unit for a period of time. It’s generally a straight forward process with the lender (you will need to prove proof of residence), but very worthwhile in terms of the interest you can save.

 

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4. Consider a Fixed Rate Loan

There are still some extremely competitive fixed rate loans around at the moment. Whilst rate shouldn’t be the only reason to switch (because you won’t know for sure if you’ll save money with a fixed rate loan until AFTER the fixed rate period has expired), the rate offered will play a role in your fixed vs variable decision.

Something to keep in mind is that you don’t have to fix in all of your loan either – you can choose to fix a portion of your overall debt. If you want to discuss this before doing anything, make sure you reach out to us and we can help talk through your options.

 

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5. Book in for a Home Loan Review

While each of the above steps will help you take advantage of the low interest rate environment (thereby saving interest, paying down your home loan faster), the easiest way to work out which step is best for you (it might be multiple!) is to book in for a home loan review.

You now know that there’s the potential to make significant savings, perhaps by making a few tweaks to your loans. And these savings are often more exaggerated if you’ve had your existing loans for a few years.

So what’s your next step?

Please don’t fall into the trap of thinking that because rates have dropped recently, things are now ‘all good’ with your home loans.

Just last month, we saved a single client over $11,000*** in interest per year, simply by reviewing his loans. This was ON TOP of the interest savings gained from the recent interest rate cuts. We identified a way this borrower could save money and after petitioning the lender on his behalf, we successfully negotiated over $11,000 in interest savings.

This was the result we obtained for just *one* client last week.

How are you feeling about the rate cuts now? Still happy that your loans are just ticking along?

 

It isn’t hard to save money. You just have to be smart about how you go about it.

Just say ‘yes’ to getting started.

Fill in your details here and we’ll be in touch.

 

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*Please note – The above does not constitute financial or credit advice and does not relate to you personally. Before a personal recommendation can be made, a Preliminary Assessment must be conducted to ensure the recommended loan product is not unsuitable for your situation. Before you consider implementing any of the general strategies outlined above, we recommend you seek credit advice from an authorised Australian credit representative. Whilst all care has been taken to ensure the material presented here is factually correct and free from error, MO’R Mortgage Options Pty Ltd accepts no responsibility for any errors or omissions or misrepresentations of fact.

***This particular client had 5 loans with one lender. We negotiated with the lender to increase the rate discount across these 5 separate loans, which resulted in interest savings of $11,000 per year. There was no refinance or loan application involved.

 

 

 

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