Opinion
Mortgage giving you heart palpitations? Try CPR
Nicole Pedersen-McKinnon
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Almost 2.5 years and 425 basis points of interest rate rises in, it’s possible your mortgage payments are giving you palpitations.
On top of an extreme uplift in the cost of everything else – the very thing the rate hikes are designed to stop – some mortgages have climbed thousands of dollars a month.
Chances are your mortgage repayments are pretty hefty, but there are few things you can do to return them to better health.Credit: Aresna Villanueva
What’s the problem?
The definition of mortgage stress is when repayments eat up more than one-third of your pre-tax household income. One in five Aussies now have to hand over more than half of their wage for their home loan, says research from Mozo.
What you can do about it
My number-crunching reveals the average Aussie borrower could be saving $432 on their monthly mortgage repayments.
Admittedly, that doesn’t cover the full amount rate rises have added to repayments, but it sure would help resuscitate a household budget.
That’s what we’re setting out to do today: administer emergency CPR for heart attack-inducing mortgage repayments. The keys to restoring your home loan to health are to compare, pressure and re-amortise.
Emergency mortgage CPR
- C stands for Compare
The average big four variable mortgage rate has reached a painful 7.27 per cent. But the best-of-breed lender still charges just 5.89 per cent – 138 basis points less.
It’s when you apply this discount to a fairly typical $500,000, 25-year home loan that you save that $432 mentioned − your repayments go from $3620 to $3188.
Now, the 5.89 per cent benchmark is for quality loans, comparable to those offered by one of the big four banks … regulated the same by the Australian Prudential Regulation Authority. Other non-bank lenders, which aren’t even cheaper right now, are regulated differently.
As such, 5.89 per cent is the key number to keep at hand.
- P stands for Pressure
Armed with that 5.89 per cent lowest-interest intel, start by calling your lender.
“I know I can get the same calibre loan for 5.89 per cent,” say to the person who answers the phone. “Can you match it?”
They are likely to say “no”, to which you should counter: “But I’m a long-time loyal customer with $xxx in borrowings.”
It can’t hurt. But if it doesn’t at all help, threaten to leave to the 5.89 per cent product (by the way, it’s from Police Credit Union).
Your lender is unlikely to discount your loan to match it, but they might slice off a bit of interest.
If that also fails, the way to apply even more pressure − before we get to an attempt to refinance elsewhere − is to call your lender’s borrowing bluff … and pretend you are leaving.
All you need to do is fill out a “mortgage discharge form” or some such − you will find it on your lender’s website or call and ask for it to be emailed.
Faced with the threat of losing your business, you may get a conciliatory call from your lender’s “mortgage retention department”.
Don’t fear doing this – if your mortgage is not paid out on the date you nominate, the form will simply lapse and your home loan will continue.
- R stands for Re-amortisation
When you move mortgage lenders to a cheaper deal, you get a double discount: you not only get the instant interest rate saving, but you also get to stretch your outstanding loan over a fresh 25- or 30-year loan term.
So your repayments fall for two reasons. Usually far.
The trouble is, thanks to the more than 4 percentage points of rate rises over the past couple of years, you could well fail the 3 percentage point interest rate “stress test” you must pass to be approved for a new loan − that is, could you still meet repayments if interest rates rose another 3 percentage points from today’s levels? That’s what people mean when they talk about “mortgage prison”.
But it’s important to know that this stress or serviceability test has been dropped by some lenders, on a case-by-case basis. Some lenders will now only check if you could cope with 1 percentage point higher interest rates.
That means, even if you have been previously rejected for a refinance, today you might be approved.
If you think that’s not an option though, an easier, more accessible strategy may be to ask your existing lender to revise the term of the loan you already have.
While this represents a material change to your loan that may require a serviceability test, that may also be more lenient (and less onerous) than the serviceability test with another lender. It’s sure worth a shot – even without a cheapest interest rate, you’d be making lower repayments because they’re over longer – on a loan balance that’s presumably lower, too.
If the above CPR doesn’t give you the financial first aid you require, and times are just too tight, don’t be afraid to tell your lender you are struggling.
Now, more than ever, confessions get concessions. They will give you some kind of – albeit short term – repayment break.
Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me, available at www.nicolessmartmoney.com. Follow Nicole on Facebook, X and Instagram.
Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.