How to turn one rate cut into five instantly

Thanks to lower inflation and a slight softening in the still-hot jobs market, the smart money is on a cut in the cash rate from 4.35 per cent to 4.1 per cent.

So say three-in-four of the experts surveyed by Finder each month. Just a few believe we’ll be waiting for rate relief until one of the next RBA meetings.

From a likely 25 basis point rate cut in the coming days, relief for a homeowner with the average loan of $641,416 will be just $103 a month.

And any further reprieve won’t be delivered fast – expectations are largely for just a couple of cuts this year; after its first move, you can bet the RBA will take its time surveying the effect.

RBA governor Michele Bullock: Financial markets anticipate a rate cut at the coming RBA board meeting.Credit: Dominic Lorrimer

Think about how much better would it be to take matters into your own hands.

The average Big Four variable home loan rate is 7.15 per cent, according to Mozo.

But the cheapest quality, comparable loans are already down below 6 per cent (with a comparison rate also below 6 per cent). The data house says The Mutual Bank, The Capricornian and Police Credit Union (yes, it’s open to the public) are all offering 5.89 per cent.

That means by switching from the average big bank loan to the best, you would give yourself five rate cuts immediately. Five.

So, if you held that typical $641,416 mortgage, your potential $103 monthly saving positively leaps to $532 as your repayments fall from $4332 to $3800.

And that’s why the main mortgage game the past few years has been refinancing. But before you even go there, phone your existing lender today. Armed with the information that you could in fact be on that best-in-market 5.89 per cent rate, ask them to match it.

They might throw you a token bit. To get anywhere close to the cheapest rates, you may well have to call their borrowing bluff.

Don’t just threaten to leave. They’ve heard it all before and indeed the person who answers the phone has limited authority to try to keep you anyway … show them you intend to do so.

Find and fill out what may be called a “mortgage discharge form” or something similar on your lender’s website. You’ll need to nominate a new lender to take over the loan and the date on which it’s going to do it.

Just pick one, perhaps from the above, submit the form and see what happens. Most lenders have dedicated mortgage retention teams that will then swing into action and do their best to, yes, retain your mortgage.

If nothing happens to ease your repayment squeeze, though, it’s no skin off your nose. When no lender takes over your loan on the nominated date, it will simply continue under the same terms. This has to happen; it won’t have been paid out.

At that point the question becomes: how can you qualify for a refinance?

Last week we saw a step forward for first homebuyers with the government recommending lenders ignore HECs debts. However, everyone’s ability to meet mortgage payments is mostly still “stress tested” to 3 percentage points (a ludicrous situation when you may well be paying almost this amount already and seeking to reset repayments with a lower base).

So getting a loan over the line is all about “swelling your surplus” so you pass the serviceability test.

Step 1: Scrutinise your score

Your credit score is your money “cred” in one revealing, possibly confronting number.

You need to make sure – before you apply – it is as high as possible. Go to one of the three Australian credit reporting agencies (Equifax, Experian or Illion) and request, free, your report and score. If your score is lower than expected, go through your report line by line and check that everything is accurate.

Mistakes can theoretically be easily fixed by the provider and then noted by the credit bureau. Don’t risk an application with an error as a rejection will drive your score down even further.

Step 2: Hem your spend

Lose any luxuries in the three months before you apply. I’m serious. Forget Uber anything, stop the streaming services and comfortably cocoon in your house rather than going out. You want to free up as much income as possible.

Step 3: Curb your credit

Rules introduced a few years ago mean that any credit card limits, even if they are unused, will count in your expenses assessment. A three-years-to-clear rule means just that – sufficient income to discharge your whole potential debt will be ruled out of your budget … and significantly decrease how much you can borrow for a mortgage.

(The same criterion is also applied to being approved for new credit, so by cancelling cards you may struggle to get all or even some limits back.) Play the refinance game right, and you could be $532 a month richer.

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.

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