Tuesday February 7 2023

A guide to saving money on your mortgage in 2023

How to save money on your mortgage in 2023

Look, we’re just going to come right out and say it: it is not a fun time in home loan interest rate land. Since the RBA began raising the cash rate in May 2022, there have now been 9 consecutive increases, taking the cash rate from a record low 0.1 per cent to 3.35 per cent in just eight months, the fastest tightening cycle in a generation. Sigh.

We won’t get into too much detail on why that is in this piece (we’ll let Jessica and Johanna from Forbes do that here). Because what we actually want to talk to you about are all the things you can do to make sure your mortgage costs are kept to an absolute minimum this year, while we all do our best to navigate the turbulent economic waters we find ourselves in.

Ok, enough commiserating. Here’s our ultimate, jargon-and-bullshit-free guide to saving money on your mortgage in 2023.

First up, let’s acknowledge that this process might feel stressful or daunting for you - that is totally normal and you are definitely not alone. Remember, mortgages (and financial concepts in general, to be honest) are often confusing and intimidating on purpose, designed to keep people overwhelmed and apathetic and ultimately putting more money in the bank's back pockets. But remember, that with the right knowledge and guidance, it is very doable - for everyone.

Now, in the interest of taking something that is pretty complex and making it as simple as possible, there are three main options for those looking to save money on their mortgage in 2023. These are:

  1. A rate review (variable loans only*) at their current bank
  2. A switch to a cheaper loan product (at their current bank)
  3. A loan refinance (moving to a whole new loan product/bank)

*If you’ve got a fixed rate loan, head on down toward the bottom of the piece

The trick is to work out which option is best for you, and from there, how to get the best outcome possible. Alright, let’s get into it…

1. How to save money on your mortgage with a loan review

As we like to say at Pure Finance: a variable rate loan is a negotiable one, and in our opinion, the humble loan review is a hugely underrated mortgage saving tool. Of course, refinancing is also an important part of keeping mortgage costs low (more on this later), but they aren’t always free and can negatively impact your credit score if you do it too often.

Put simply, a loan review consists of assessing where your current variable interest rate is sitting in the market (i.e. is it competitive?) and then contacting your bank to ask for a discount. If you’d rather have someone do this for you, then we are your people and you can contact us here. However, if you’d rather give it a go yourself, here is our step-by-step guide for DIY loan review success. After all, if you do it as often as we do, you get pretty good at it.

STEP 1: Do some market research

First up, you need some negotiating power in the form of cheaper rates from other banks. Similarly, some banks often use cheaper introductory rates to ‘lure’ new customers, while leaving many of their existing customers on higher, less competitive ones. So, make sure you also check the rate your current bank is offering new borrowers, and see where yours sits in comparison. Then, make a list of the banks and their rates (2-4 should be enough), and have it handy for Step 2…

TIP: Remember, you have to make sure you're comparing apples with apples here. For example, is your rate type fixed or variable? If it's variable, does it come with an offset account (aka a 'package') or without one (aka 'basic'). Whatever the particulars of your loan are, you’ll need to make sure you’re comparing with loans from other banks with the same features. A lot of the time a basic variable rate will be cheaper than a package loan (more on that next). Don't let the bank talk themselves out of reviewing your loan because you've (unknowingly) compared the wrong loan type.

Secondly, you'll also need to check in on where your remaining loan balance is sitting, against an estimate of your property value (aka your Loan-to-Value Ratio or LVR worked out as a percentage). Banks generally reward lower LVR's with lower interest rates (and love to advertise these). If you know you're sitting at 90%, you unfortunately can't expect the same interest rate as those offered to loans sitting at 70%. But, this doesn’t mean you can’t do some market research and ask for a discount!

Too much maths? We hear you. Reach out and we'll be more than happy to help.

STEP 2: Call up your bank and get ready to negotiate

Armed with your list of cheaper rates, call up your bank and let them know that you’ve seen better rates elsewhere, and that you’re thinking of moving if they don't give you a discount. Sounds daunting and you’d rather not? We get it. Here’s a bit of an example script of how the conversation could go, to help take the edge off:

“I’ve been doing some research and I’ve seen that Bank A is offering XX% and Bank B is offering XX%. I’ve also noticed that you’re offering XX% to new customers. I'm currently paying XX% which seems a bit high, so what can you do to keep me?”

Alternatively, you could also name drop us to really get things moving:

“I’ve been speaking with a mortgage broker and they’ve suggested I move to Bank A at XX%. Can you match that?"

Remember, if the person you speak to first isn't overly helpful, or the discount they offer isn't close enough to what you’re after, you can ask to be put through to ‘someone else that can help further’. Then, you’ll most likely be transferred through to your bank’s retention department, which is exactly who you want to be speaking with, considering it’s their job to try and keep you.

At this point, your bank will come to you with an offer, and while you don’t really have much more to bargain with here, you can definitely still try:

“That’s still pretty far from what your competitors are offering. Can you do any better? Otherwise, I think I’m still going to leave.”

From here, it’s just a matter of working out whether it’s worth staying or going. Which brings us to…

STEP 3: Weigh up your options and do the maths

Once you’ve got your offer from your bank, you’ll want to work out whether it’s worth taking them up on it, or refinancing somewhere else. Here, you’ll need to consider things like:

  1. If you do decide to leave, will the new loan product genuinely be better than the one you’re already on? Similarly, is the bank you’re moving to notorious for rate fluctuations, or are they relatively stable? (Better the devil you know, and all that)
  2. What will the financial benefit be in real terms, once all costs have been factored in? Often times when we do the maths, we can see that once all the refinancing costs are included (e.g., a fee for leaving your current bank, fees for setting up your loan at the new bank, government fees) it can take 10 - 24 months for the lower repayments to equal those costs. A cashback offer can help to cover these costs, but often is the bank’s way of enticing potential customers to a non-outstanding interest rate, so you need to be discerning if you’re doing this alone.
  3. Could I potentially get the same result from asking for a discount, or moving to a cheaper product, at my current bank? (Does your current bank have any comparable products [often they will], and is a move to a whole new bank really necessary? Has your broker really done all that they can to get your current bank to come to the table?)

We know we sound biased, but a good mortgage broker is a free sounding board that legally has to act in your best interest. They can help you to understand these questions and guide you with your decision making. Or, they can even just be a second opinion.

2. Switching to a cheaper product at your current bank

Another option is reassessing the loan product you’re currently on, and cross-checking that against cheaper options at your current bank. What do we mean by this? If you’re currently on a variable rate that comes with an offset account (aka a ‘package’ variable rate), your interest rate, a majority of the time, will be higher than a variable rate that doesn’t come with an offset account (aka a ‘basic’ variable rate). The other kicker is that package loans often come with an additional fee - either a lofty annual one or a smaller monthly fee. Switching products could help move you to a lower interest rate, and reduce the fees you’re paying every year. 

Generally speaking, we usually recommend looking to keep at least $10,000 in your offset account, to make sense of the additional fees. If you find you’re struggling to maintain this amount, it could be worth revisiting the numbers to see if you could better save on a basic loan product (without an offset account). 

HEADS UP: This option does include a fair bit of finicky, personalised maths, because you need to consider the difference in the two interest rates affecting your repayments, how much money you have in your offset account and how that helps reduce your monthly costs, while taking into consideration the fees for having an offset account. (Whew!)

If this is making your head spin, please reach out to us (or another trusted mortgage adviser) to help you understand whether this is a good option for you. We know we bang on about personalised advice, but this option truly benefits from it.

3. Save money on your mortgage with a refinance

So if neither the rate review or the product switch yielded the results you were after, then it might be time for a loan refinance. Again, we’d recommend using a trusted mortgage broker for this because it can save you A LOT of time and effort (for free!). But if you’d like to do it yourself, and you absolutely can, then here are our best tips:

Again, make sure you’re comparing apples with apples here. It will be very unfortunate if you spend a whole heap of time researching other loans, only to find you’ve been looking at owner/occupier rates when you’re looking to refinance your investment loan (as just one possible example of many).

Be open to smaller, lesser known banks and lenders. As a general rule, major banks tend to be more expensive, and they are no better than some of the lesser known ones. If it’s savings you’re after, the little guys might be worth a look.

By the way: are you looking for a cheaper rate AND a more ethical bank? It’s music to our ears! Let us help point you in the right direction.

Be as discerning as possible and look out for dodgy advertising/marketing. Unfortunately, there is a lot of misleading advertising happening with mortgage rates at the moment and it can be really hard for people to navigate the rate comparison environment. Some things to be aware of:

  • If a rate seems ‘too good to be true’ (i.e. a mile cheaper than anything else in the market) then, it probably is. For example, there are still some old rates being advertised that are no longer available, especially with things changing so rapidly at the moment
  • Not everyone is always eligible for certain rates/loan products, and often, advertisers will leave eligibility requirements and relevant T’s & C’s out of their ads
  • ‘Cashbacks’ for refinancing might sound great, but it shouldn’t be your only consideration when moving to a new bank. It’s much better to assess the refinance on longer-term savings merits, and to treat any cashback offer as just icing on the cake.

Navigating negative equity. While no one can predict what will happen to property prices over the coming years, it's important to understand the implications of falling into negative equity, particularly as interest rates begin to rise. If prices do trend significantly downwards and your LVR exceeds 80-85%, you might find it difficult to refinance, or borrow more money, without having to pay Lenders Mortgage Insurance (LMI), which can be in the tens of thousands of dollars (depending on your loan amount). If you’re concerned about this, we definitely recommend getting some expert advice.

Refinance vs. loan review?

You’ll often hear the mortgage industry talk about the importance of loan refinancing, particularly during times of interest rate fluctuations (like right now). But, as you’ve just read, a loan review could very well be enough to get yourself a better variable interest rate.

You don’t often hear about the benefits of reviewing and renegotiating loans (in place of refinancing) because here’s another little piece of information that gets conveniently left out of the conversation: a mortgage broker gets paid for refinancing a loan, but not for reviewing one. In fact, lowering your rate at your existing lender could likely lower your broker's commission - so, make of that information what you will. A good broker, that is genuinely acting in your best interests, won’t put you through the rigmarole of a refinance if the net benefit is negligible, and often (as proven by our annual loan reviews) getting a better deal on your home loan can be as simple as just asking for one!

For people on fixed rate loans…

Most of the people currently on fixed rates will likely be in a better position than those on variable rates, and will be happy to stick out their fixed rate period (lucky devils). Though, depending on when their fixed period is ending, they should definitely be thinking about what their next moves will be.

For anyone that is currently on a fixed rate, here are some things to consider:

Know exactly when your fixed rate is ending and make a plan. We know it sounds simplistic, but plenty of people aren’t actually across this. If this is you (you’re not alone!) and we recommend making a note of exactly when your fixed period is ending and getting a plan in place for your next moves well ahead of time.

Revisit your repayments and budget for the future change. Depending on when you fixed, it sure is a different landscape out there now. When looking at your future options, it’s a good idea to understand the changes in repayments your new (most likely higher) interest rate will bring and budgeting for them ahead of time.

Consider all the costs if you decide to break your fixed period. The thing about fixed rate loans is that the bank treats them like a contract. If you break the contract early they’ll charge you a ‘break fee’. These fees can range from a few hundred dollars to tens of thousands of dollars and it’s worth considering and preparing for, particularly if you’re looking into re-fixing again before your fixed rate expires, or refinancing elsewhere. If you decide to re-fix with your current bank, it’s also worth trying to negotiate for the bank to waive this fee.

Need some help with all of this? We know someone…

If you’re worried about managing your repayments

If you’re really starting to feel the pinch, and you’re worried your repayments might become unmanageable in the near future, then we want you to know that you have options. All banks in Australia have a financial hardship department and they are available to help tailor a temporary solution to help you through a period of financial difficulty.

Things like a repayment pause, or an extension of your loan term, are some of the most common arrangements that can be made and, if you feel like you need this kind of support, then please reach out to us. We’ll help link you up with your bank's financial hardship department to get the process started. 

SOME THINGS TO NOTE: Applying for financial hardship does not affect your credit rating, and it is a confidential arrangement between you and your bank. Also, a pause on your loan repayments doesn’t mean a pause in the interest you will accrue during this time, which unfortunately means that borrowers will be looking at higher costs in the long term if they defer payments. Again, if you have ANY questions or concerns around this, please get in touch. This is what we are here for!

More information on applying for financial hardship can be found here and those experiencing extreme financial hardship can access free, financial counselling and support here. You can also contact the National Debt Helpline here or by calling 1800 007 007.

Any other cost-saving mortgage tips while we’re at it?

Apart from all the above, here are a couple of other quick tips that can help you save money on your mortgage this year (or any time, really).

Using your offset account effectively (if you have one). The more cash you have in your offset account, the less you pay in interest. Plus, you can easily access this money again if you need it in the future (so it’s not locked away for good).

Making weekly/fortnightly repayments (instead of monthly). Here’s why: the interest on your loan is calculated daily. So, by switching your repayment frequency from monthly to fortnightly repayments, you’ll lower the loan amount (and how much you pay in interest) and shorten the term of your loan.

Making extra repayments. Obviously, this is not for everyone right now, but it is always worth mentioning. The best way to pay off your mortgage faster (ultimately meaning less interest) is making any extra repayments where you can. It’s also a good way to prepare for any anticipated rate increases and by working them into your budget sooner, you can reduce future repayment shock. Though, we would like to point out that making your minimum payments right now is absolutely good enough, if that’s where you’re at.

‘Interest Only’ repayments. Depending on your needs and circumstances, it may be possible to take a loan product with interest only (IO) repayments. Contrary to a traditional principal and interest (P&I) loan product, where repayments cover accrued interest while also paying down the loan principal, repayments made on an IO loan don’t reduce your loan balance at all. The main reason someone might choose IO over P&I repayments is to help improve their cashflow in the short-term. However(!), the drawback to taking an IO loan is that once the term ends (generally between 1-5 years), a borrower has less time to make their P&I repayments, therefore making repayments more expensive than if they were P&I from the outset. So, while an IO loan can provide a short-term boost to cash flow, the borrower eventually has to make up for this. Plus, moving to an IO loan product requires a full home loan application, where affordability will be considered, so if you’re already feeling the pinch then chances are you might not be eligible. Full transparency: we don’t usually recommend this as an option (except in very certain circumstances) so if this is something you are considering, please promise us you will get some personalised, independent advice first. We mean it!

Consolidate other higher interest debts into your mortgage. Technically, this isn't saving money on your mortgage per se, but it can help you save money elsewhere by rolling any higher interest debts you have into your lower rate home loan (think car loans, personal loans, credit cards etc.). You can read more about debt consolidation here or reach out to us if you’d like to have a chat about your options.

Finance is an industry well known for using jargon-laden copy and hiding details in the fine print. While these practices can not only be frustrating and alienating (particularly for those from financially underserved communities) they can also, quite literally, cost people money.

As a for-purpose finance company, (check us out here!) we want to help people make better, more conscious choices about the financial products and services they use and turn a jargon-filled, overwhelming and, at times, disempowering process into one that enables people to feel included, confident and in control of their financial future. Through a company-wide commitment to ethical marketing practices and by providing free, accessible communications that are not behind a paywall, or that don’t require personal information to access, we’re working to level the financial playing field - for everyone.

If you found this post helpful or insightful, or, if you’d like to have a chat about your own personal situation, we’d love to hear from you! You can contact us via this form here, or by emailing us → info@nullpurefinance.com.au

The financial information provided in this article is general advice only, and doesn't take into account your personal circumstances, needs or goals. You should always reach out to us, or seek professional advice, before acting on it or making any financial decisions.

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