This was published 2 years ago
Opinion
Why I’m happy to no longer be mortgage-free
Nicole Pedersen-McKinnon
Money contributorI wrote the book on becoming mortgage-free. Literally: How to Get Mortgage-Free Like Me. But now I need a new one.
A year ago today, I sadly, amicably split with my children’s fantastic dad… and I want to buy his share of our family home.
So, I find myself, once again, at the beginning of another home-loan borrowing cycle, carefully weighing up how I can most effectively get into – then crucially out of – debt.
Weighing up the surety of a fixed-rate mortgage with the ability to still have access to your cash is important.Credit: Kerrie Leishman
The broader economic environment is different for me this time around, with inflation spiking and the Reserve Bank increasing official interest rates, with more rises on the way.
Regular readers will know I usually have reservations about fixing mortgage interest rates.
If you fix your rate, you are betting against teams of economists and analysts that you know better than they do as to the future direction of official rates. However, despite that, I am now leaning towards fixing my rate. For half the size of my mortgage, at least. Maybe even two-thirds.
‘As a single mother now, surety has taken precedence. I need to know that my mortgage costs are contained.’
You should never fix the lot… I will explain why that is a hard-and-fast rule for me below.
Sure, I have missed the ideal time to fix my mortgage rate – life can’t be timed – but, as a single mother now, “surety” has taken precedence. I need to know that my mortgage costs are contained – as much as possible.
And for all the smart money theory in the world, the reality is your financial strategy needs to make you feel relaxed and comfortable.
I fixed half the mortgage interest rate for our first home – an apartment – in what turned out to be perfect timing.
It was 2005, and we threw every spare cent – and some that weren’t spare – at the variable-rate portion of the loan. With focus and frugality, we had paid it off by the time the three-year fix ended. That our fix was static as variable rates rose kept money there to pay extra.
Offset ‘secret weapon’
However, when I say “we threw every spare cent at the variable portion”, I actually mean something different: we threw money at a mortgage offset account that ran alongside the variable-rate portion of the loan.
An offset account is a debt-busting “secret weapon” because it lets you use every dollar that passes through your hands twice: For its intended purpose – next holiday, school fees, emergency fund, whatever – and to slash your loan interest and, ultimately, the amount of time you spend in debt.
You still have the money at the end, too. It just saves you a fortune in interest along the way.
If you want to execute a life-flip and, say, decide to move states like we did, filling up an offset account with cash instead of paying down your mortgage itself means you can get access to the money to buy your next home.
In a further benefit, you have never technically paid extra off your mortgage, so you have an option to turn home No. 1 into a tax-effective investment property.
“Option” is the key word when it comes to offset accounts. Clever use of them not only allows you to get mortgage-free faster, it keeps a door open for future property purchases.
It also quarantines the money from your lender, unlike relying on a redraw facility, so you retain access to it if you get into financial strife.
Lenders have an ability to “re-calculate” your loan balance and absorb any extra payments you may have made into the loan, should you get into financial trouble. Read the fine print in your mortgage contract.
But here’s the thing: fixed-rate mortgage products usually don’t carry a full offset account. That’s why I would never fix all of my loan. At the least, my emergency cash pile needs an interest-optimising home.
Seismic rate shift
What are you looking at if you fix now? Paying a fair bit extra upfront. The recent fixed-rate increases have been, well, extreme.
Mozo head of research Peter Marshall told me: “I don’t think I have seen such large rate movements in my [almost] 40 years in finance”.
The seismic shift in interest-rate expectations is evidenced by the Commonwealth Bank’s (CBA) huge 1.4 percentage point increase in some of its fixed-rate mortgages last week.
Note, though, many lenders are becoming more competitive on their variable interest rates. CBA last week discounted its no-frills variable rate product by 15 basis points… if you have a 30 per cent deposit, you pay just 2.79 per cent.
No offset, so “no thank you”.
Across the entire market (fully featured products, too), the average standard variable mortgage interest rate is now 4.37 per cent, according to Mozo.
The average of the big-four banks when you consider just the discounted packaged products is 4.2 per cent.
However, the cheapest variable rate in the market from a lender with an offset account is Well Home Loans, at 2.6 per cent. Of course, there’s a rub – those variable interest rates will go up. Possibly by a lot.
When you consider that at the beginning of this year, fixed rates were at about 2 per cent, you can see how dramatic the change has been.
Does it change my decision to fix the interest rate on part of my mortgage, and keep the rest fluid, so I can work an offset account to ditch my new debt more quickly?
No chance. Not much is sure in my world right now. I need my monthly repayment to be so.
- 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.