Barefoot Investor: How to wipe seven years off your mortgage
WHEN Scott Pape advised this family they needed to find another way to regain financial control they made a life changing decision. Plus how to wipe seven years off your mortgage.
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BALLARAT couple Kylie and Neil May made the brave decision to pack up and move to the country this year, in an effort to regain their financial stability.
Kylie, 44 and Neil, 47 with their two daughters Talleah, 9, and Allira, 11, decided to leave their 17-year-long life in Melbourne behind and make the move to Ballarat, after Kylie got diagnosed with breast cancer.
The cost of the medical bills heaved upon the family were humungous and Kylie looked to Scott Pape for advice, in regards to accessing her superannuation early in order to help pay them off.
When Scott advised they find another way to regain financial control, the couple reconstructed their life plan.
“We were encouraged to think of other ways and think outside the box and that’s when the penny dropped,” Mrs May said.
While selling their eastern suburbs Melbourne home wasn’t an easy decision, the couple say it has been the best thing for their family as they now live happily in the countryside mortgage and debt free.
“It’s changed our life,” she said.
Kylie, who works as a nurse and Neil as a plumber, believe their new lifestyle allows for more time with their children and makes travelling, as well as setting up a financial plan for their little ones a lot easier.
“We wouldn’t have been able to do any of those things before, but we have our financial control back now”.
HOW ONE PHONE CALL COULD SAVE YOU $22K
HERE’S the deal: it costs your bank about $1000 in marketing costs to replace you (and about six times that amount if you come via a mortgage broker they pay kickbacks to).
That’s your negotiating power right there.
Here’s how to use it.
First, I want you to google “UBank Home Loan Rate”.
Second, call your bank, ask for the “customer retention department” and use the “$22,064 Phone Call Script”.
This phone call can save you $22,064 in interest (based on a $400,000 mortgage over 18 years at 4 per cent).
Over the years I’ve had plenty of readers do this exact negotiation on the phone (even on their way home from work) and in most cases they’ve reported back that they’ve saved themselves a huge amount of money.
But what if your bank says no?
Easy. Ring them again. What if they say no again?
Don’t bitch, switch. (As long as you have more than 20 per cent equity in your home. If you don’t, you’ll get hit with another round of lenders mortgage insurance (LMI), which will eat up any savings you can negotiate.)
Now, here’s how to hunt for the best mortgage.
Straight up, if you’re going for your first home, check out the online players like UBank and ING, which generally have the cheapest rates (although you’ll need to have a
20 per cent deposit and a solid savings history).
But what if you’ve got a more complicated set-up — like being self-employed, or having multiple loans? In that case you need a mortgage broker — but not just any mortgage broker.
BAREFOOT’S VERDICT ON THE FIRST HOME SUPER SAVER SCHEME
THE $22,064 PHONE CALL SCRIPT
You: Hello, my account number is ______. I’ve been with you for ___ years, but I’ve applied to refinance with UBank. Their rate is ____ per cent, which is a full ___ per cent cheaper than you’re charging me. Given our longstanding relationship, I’d like you to match the offer — or send me the forms I need to switch to UBank.
Bank rep: One moment, please.
(You’re bluffing, of course. However, the bank’s sales team have strict targets, backed by incentives, that they have to meet — one of which is giving profitable customers discounts to stop them leaving.)
Bank rep: We can’t match the rate you have quoted. However, we understand you are a valuable customer, so we would like to offer you a 0.15 per cent discount.
You: That’s not good enough. I’ve already got conditional approval … so in order to stay
I need at least a 0.5 per cent discount. Could you please speak to your supervisor? I’m happy to wait.
Bank rep (a full six minutes later): On reviewing your case, we can offer you that 0.5 per cent discount on your current rate.
You: Brilliant! Please send me an email confirming the new rate and confirming that it will be applied as of start of business tomorrow.
SUPER SATISFACTION IN A LIFE WORTH SAVING FOR
THE MORTGAGE INDUSTRY’S DIRTY LITTLE SECRET
When you get a loan through a mortgage broker, they don’t charge you anything.
But make no mistake, they still get paid — and in two ways: the bank they recommend pays them an upfront commission (around $3000 on an average loan), and then they get a “trailing commission” (read: kickback) for the life of your loan (up to $1000 a year, every year).
The solution is to get a broker who’ll charge you an upfront fee (which is a fair cop for their expertise) but will refund the trailing commission off your mortgage.
They’re called “cashback mortgage brokers”. I used them when I bought my farm, and, when the cashback was kick-backed to my loan each month, I got the same buzz I assume a pokie-punter gets when they score “five free spins”.
(Most mortgage brokers hate me for highlighting their kickback structure — some have threatened me with physical violence.)
MAKE EXTRA PAYMENTS
If you pay just $1000 extra (more than your minimum repayment) a month off your home loan, along with getting a cheaper rate, you’ll save $77,641 in interest and wipe almost seven years off your mortgage (based on a $400,000 mortgage over 18 years). To work out exactly how much you can save, head over to ASIC’s MoneySmart Mortgage Calculator and do the sums with your own mortgage.
THE PROUDEST DAY OF MY FINANCIAL LIFE
I used to describe my mortgage as “like wearing a pair of really nice but really tight shoes”. Sure, they looked good, but they made every step painful, and I couldn’t wait to kick off my shoes and tread my own path.
Let me tell you about the day I got the banker off my back. Now, I could have made the final transfer via internet banking, but I didn’t.
Bugger that.
I had visions of strutting into my local branch like a peacock and my bank manager would greet me at the door with a little sponge cake she’d bought from Woolies on her way to work that morning, to mark this momentous day.
And behind her the entire branch would gather in a circle and start clapping, and then balloons would fall from the ceiling and they’d yell, “Speech! Speech”, and I’d act all surprised and gracious … while I was secretly loving every minute of it.
That’s not what happened. Here’s how it actually went down:
Barefoot: I’d like to make the final payment on my mortgage and close my account, please.
Teller: Okay. (Silence, other than the tappety-tap of her keyboard.)
Barefoot: It’s a nice feeling … to pay off my mortgage.
Teller: Uh-huh. One moment.
The teller went over and spoke to the bank manager, and a minute later they both came back to the little glass window where I was standing.
Bank manager: Hello, Mr Pape. I’ve got to warn you that it’s actually not a prudent idea to close off your home loan.
Barefoot: Why?
Bank manager: Well, think about it. You now have an opportunity to build your wealth by buying an investment property — or some shares — using the equity of your home, and we already have this facility in place.
Barefoot: Just discharge my mortgage and give me back my title …
Bank manager: That’s the thing. It actually costs you a lot to discharge your mortgage, but it costs you nothing to keep a line-of-credit facility just in case.
Barefoot: I’m going to frame it, and put it on my wall.
Bank manager: You’re in the minority … most customers …
Barefoot: This is one of the proudest days of my life. I’ll happily pay the fee. This is not a negotiation.
That night, Liz and I celebrated, and I swear the grass under my bare feet felt different. And once you get the banker off your back, it’ll be the same for you too.
BAREFOOT INVESTOR: SCOTT PAPE’S 2018 FINANCIAL ROAD MAP
MENU: BAREFOOT DATE NIGHT WEEK 3
This is going to be a big payday for you, so I want you to go somewhere really cool for your Barefoot Date Night (preferably a joint where the staff don’t wear name tags). Because by the end of the night you’re going to be really proud of yourself.
ENTREE:
Make the $22,064 phone call to your bank. Follow my script (see box).
What if they say no?
Easy. Just ring them again. Talk to someone else. Go on. You’ve got time before your main arrives.
What if they say no again?
It’s highly unlikely they won’t give you at least some sort of discount — the squeaky wheel generally gets the oil (just ask Shane Warne). Research from comparison site finder.com.au reveals that of the people who (like you) spend half an hour visiting their bank about their home loan, four out of five are successful in getting a better rate.
However, if you’re not getting any love whatsoever, it could be because you haven’t yet built up enough ownership (equity) in your property. If that’s the case, stick with your current lender until you’ve paid down more of your mortgage, preferably 20 per cent, so you don’t get hit with LMI.
MAIN COURSE:
The fastest way to get the banker off your back is to make extra mortgage repayments.
Of course, you’re still making the minimum payments; what I’m talking about is the payments on top of the minimum. Make it automatic, so life doesn’t get in the way of your mission. Budget 10% of your take home salary to paying extra off your mortgage. That’s on top of the minimum. Set up a regular direct transfer to make it automatic.
Next, whip out for your phone and google ‘ASIC MoneySmart Mortgage Calculator’ and type in your details (current mortgage, current interest rate, and extra repayments). It’ll calculate how much you’ll save both in dollars and how many years it’ll wipe off your mortgage.
DESSERT:
It’s time to get loose: Jägerbombs. Most people have a home loan. Very few people go through this process of systematically knocking down their mortgage, and that’s exactly how your lender likes it. (They’re more than happy for your neighbour to spend an extra six years paying off his mortgage.) Not you, though. You’re on your way.
Bottoms up!
The Barefoot Investor holds an Australian Financial Services Licence (302081). This is general advice only. It should not replace individual, independent, personal financial advice.
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