Opinion
The five best quality home loans charging under 6 per cent
Nicole Pedersen-McKinnon
Money contributorHi Nicole, we are a double income family of four with our income (our children are teenagers now) back up to $170,000 a year between my wife and I. That sounds a lot and is a lot more than when the kids were little, but there is virtually nothing left now after our expenses.
We have a $580,000 mortgage with about $500,000 left to pay (on a house worth far more) and our repayments are currently $4026 a month. We also have $50,000 sitting in an offset account (following your warnings, not directly in the loan).
My question is: is there any way to cut our repayments? The $50,000 is the only emergency money we have to our names, but should I pay that off the loan once and for all to cut our repayments? Thanks, Brett
Interest rates are unlikely to drop soon, so it’s best to find savings where you can.Credit: Nine
Brett, talk has – distressingly for mortgage holders – turned to the possibility that rate cuts now won’t happen until next year and there may even be a couple of rises before then.
So, anyone who hasn’t already optimised their interest really ought to. Though it’s probably possible to cut costs across the gamut of a household’s bills, it’s their home loan where people usually stand to save the most.
Your current repayments mean you are paying an interest rate, over 25 years, that’s bang on average at 6.8 per cent, according to mozo. You can do way better.
I asked the comparison house to identify for you the cheapest home loans that meet particular criteria. And there are five that charge under 6 per cent.
These are: G&C Mutual Bank’s Essential Worker Home Loan (5.8 per cent), Tiimely’s (formerly Tic:Toc) Variable Home Loan (5.94 per cent), Up’s Home Variable Rate (5.95 per cent), Northern Inland Credit Union’s Dream Value Home Loan’s Special Offer and The Capricornian’s Country to Coast Variable Rate Offset Home Loan (both 5.99 per cent).
What criteria did I set? I wouldn’t consider any loan that wasn’t issued (or backed) by what is called an authorised deposit-taking institution. Only these products carry genuine offset accounts – linked deposit accounts – rather than redraws in disguise. That means only these offsets are covered by the Australian government’s $250,000 deposit guarantee scheme.
Also, as you allude to Brett, holding money in an offset account instead of relying on your lender letting you redraw it is the only way to guarantee access. This is particularly important if this is the money you have designated as an emergency fund for if life goes a little awry.
Your $50,000 is thus your lifeline so, no, don’t lose it into your loan and leave yourself and your family exposed.
Let’s assume you are not essential worker and instead look at refinancing to the 5.94 per cent Tiimely rate. You have equity aplenty, and it’s a big positive you’ve paid down $80,000. You could also opt for a 30-year loan term this time to further cut your minimum repayments.
Doing all this would see them fall from $4026 to $2978 – so you’d save $1048 a month. But what of this scary concept of mortgage prison: being stuck in your higher-cost loan because to get a new one, you have to pass a repayment stress test that now starts at current interest rates?
It essentially comes down to affordability, and you give yourself the very best chance with these two steps:
- Trim your spend in the three months leading up to applying. By virtue of today’s extreme cost squeeze, you’ve probably already had to do that.
- Cut your cumulative credit card limits. These limits – even if unused – will cancel a large amount of your capacity to repay. In the calculation, a lender will rule out sufficient income to clear the lot in three years; the formula is your card limit x 0.038 so a $10,000 limit will wipe out $380 of your monthly income. This bit of your salary would be sidelined, so think about cutting limits (if not your cards themselves).
You’ve got this Brett.
Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me, available at www.nicolessmartmoney.com. Follow Nicole on Facebook, Twitter or 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.
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