Rate ‘wriggle room’ has given way to a secret mortgage discounting war

Hi Nicole, I am a single mum and full-time teacher. I’m extremely keen to reduce my debt and pay off my mortgage more quickly, but I’m not sure what I can do right now. I only purchased my house in December 2021, and I fixed the majority of the mortgage interest rate for two years. My loan doesn’t have a mortgage offset account. I put the rest of my savings into the variable loan to reduce the interest, but now I’m worried I’ve done the wrong thing. I believe there’s not much I can do until I come out of the fixed interest period, and can then switch to a loan that has an offset, although I fear what the rates will be when that happens! Any advice? Kristen

First, Kristen, well done for securing a loan so recently. The approval hurdles are high, especially when you are on a single income.

At that stage, you will also have locked in at a cheaper rate compared to the expensive fixed rates now on offer. In fact, the timing of your commitment was impeccable.

So desperate are lenders to stem a borrower exodus that they are offering unprecedented interest reprieves. But it is all happening behind closed doors.Credit:Simon Letch

Keeping a portion of your loan on a variable rate was well played, too.

One of the downsides of fixed rates – apart from the risk you’ve avoided that you will end up paying over the odds – is that you cannot pay extra on a fixed-term loan. However, by paying extra into your variable mortgage you have brought your “freedom date” forward.

Your strategy here is mathematically identical to paying extra money instead into an offset account.

There is something you can also do now to keep powering ahead with your loan despite rate pressures, and all you need to do is pick up the phone. By simply doing so, lenders are offering on-the-spot discounts of as much as 1 percentage point off.

And that’s whether they are large lenders, where there has always been a bit of rate “wriggle room”, or the smaller, what-you-see-is-usually-what-you-get guys. In fact, in secret, there has started a fierce mortgage discounting war.

So desperate are lenders to stem a borrower exodus – refinancing spiked to a record high of $18.1 billion last month – that they are offering unprecedented interest reprieves. But it is all happening behind closed doors, on a case-by-case basis.

All that is being publicly announced is price slashing on basic home loan products, which do not come with offset accounts.

Home owners are moving away from the big-four banks in search of better deals.Credit:Paul Rovere

Without an offset account yourself, you either have such a mortgage with a larger lender or one with a non-bank, online lender that cannot offer them. Either way, you could obtain an instant discount on your variable interest rate portion of your loan.

For other readers, the best way of doing so is threatening to take your business to a cheapest-in-market loan with an offset account: in the low 3 per cent range. Anyone paying a rate that starts with a 4 or 5 should today be thinking about jumping ship.

However, your fix stops you from leaving, so your best approach is to instead explain that you are a single mother who is now more strapped for cash, and you know that 1 percentage point discounts for existing customers are common.

If successful, I would keep the repayment saving in a high-interest savings account, so you could retain emergency access to it.

The thing is that paying money directly into a home loan can act like a one-way trap door, particularly in tight times. Lenders can lock it up if you get into financial difficulty, or even simply recalculate your loan balance and subsume it.

When your fixed-rate term ends, you could look at refinancing to a product with a flexible offset account because, in almost perfect timing for your expiry, rates are forecast to fall from the middle of next year.

And you will already have a mortgage-freedom head start.

  • 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.

Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me. Follow Nicole on Facebook, Twitter, and Instagram.

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