How to save $77,641 off your home loan
GET the banker off your back and take control of your mortgage, writes Barefoot Investor in week 3 of the Ultimate Money Saver Guide.
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FOR Week 3 of the Barefoot Date Nights Challenge, I want you to go somewhere really hoity-toity and — what the hell — arrive in one of those stretch limos that only old farts (with lots of money) and young kids (going to their end-of-year formal) bother hiring. Get ready to save tens of thousands on your mortgage with just a few phone calls.
THERE are only two ways to pay your mortgage off more quickly: 1. Lower your interest rate, and, 2. Make extra repayments. On your first Barefoot Date Night, we’re going to do both.
YOUR $22,064 PHONE CALL
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” (see THE 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 that they’ve saved a huge amount of money.
But what if your bank says no?
Easy. Ring them again.
What if they say no again?
Don’t complain — 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, which will eat up any savings you can negotiate.)
YOUR SCRIPT AND DATE NIGHT MENU
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 …
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 (about $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 get home, 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 entering into my local branch — strutting in 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: OK. (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: 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 …
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.
ADVICE HELPED PLAN FOR THE FUTURE
STEPH and Jesse Reynolds live with their two boys, Alfie, 10 weeks, and Jed, 2.
Their current home is the third home they have bought together and they got a far better deal on their mortgage this time around.
Buying their first investment property, they made the common mistake of saying yes to the first offer made to them.
But Mrs Reynolds said the Barefoot Investor’s advice has helped them plan for the future and saved them a lot of cash on their mortgage.
“Like so many people, in my early 20s I had an out-of-control credit card, and when we bought our first house, we got sucked into a really crappy loan,” said Mrs Reynolds.
“This time we are more aware of what to go for and what to ask for and not to accept the first thing we are shown.”
The young family, who live in Highton, a suburb of Geelong, do not love talking about finance, but realised that they had a responsibility to their young boys to take control of their personal finances and found the advice has helped.
“I don’t like reading long things about finance but I read Scott Pape’s new book in one night, in between breastfeeding and handling our two-year-old,” Mrs Reynolds said.
Buy The Barefoot Investor: the only money guide you’ll ever need for $27.95 including delivery. Order online at heraldsun.com.au/shop or call 1300 306 107. For mail order, post a cheque/money order to: Herald Sun Shop PO Box 14730 Melbourne Vic 8001.
Originally published as How to save $77,641 off your home loan
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