Mortgage tactics...

Hello everyone,

I was thinking about my mortgage the other day and how I can get it to perform better for me. Its only been recently that the light bulb has turned on inside my head and I've realized that my finances could be a lot better than what they are.

So I've been told that re-financing is not the best option for everyone. Somewhere around the 5 year mark your bank will call you and offer to reduce your monthly repayments by $100 or so. Most people jump at this chance with out any real thought.

I am sure I am not telling you guys anything new, I mean I joined up here to learn, but for those that don't know or may be looking at refinancing here is the catch:

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At the beginning of the life of your loan you are paying mainly interest. You pay very little of the principal of the loan. As the loan progresses over its 40years or so, you start paying back the principal of the loan.

So after 5 years or so you start to hit the sweet spot. The payment of your principal is starting to accelerate and by the time you get to the end of your loan everything is upside down from the banks point of view. If you imagine in the beginning your monthly payment consists of 95% interest, and 5% principal towards the end it gets inverted and your paying 95% principal and 5% interest.

So if the bank can get you to refinance they will work out what you owe over the next 40 years again. Originally you might have owed 500,000 over 40 years and now you've paid back 10,000 so 490,000 over 40 years would translate to a lower monthly repayment.

Sounds great, but your back to paying 95% interest and 5% principal.

If the bank can keep you in their sweet spot, the first 5 or 10 years of the loan, the majority of your repayments are going to be eaten up by insurance. YOU'LL NEVER OWN YOUR HOME!!
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So my question is this:

Could you (and is it worth it) refinance to reduce your monthly payment, but keep paying what you would have if you did not refinance? That way, your now paying off a larger portion of your principal with the same payment. Has anyone looked into this? Maybe you end up in the exact same position as if you didn't refinance?

Not sure if this was the correct place to ask this, or even the correct forum but I figure you guys are onto it with money matters

VG.

Simply making a larger payment will automatically mean you are paying off the principal faster. There's no need to refinance or make other changes in order to do this, assuming that your loan allows additional repayments to be made.

The only real benefit in getting the bank to reduce the required monthly payment is if you will actually do plan to pay less than you currently are either some or all of the time. That means you would be stretching out the duration of the mortgage however.

Smurf1976 said:

Simply making a larger payment will automatically mean you are paying off the principal faster. There's no need to refinance or make other changes in order to do this, assuming that your loan allows additional repayments to be made.

The only real benefit in getting the bank to reduce the required monthly payment is if you will actually do plan to pay less than you currently are either some or all of the time. That means you would be stretching out the duration of the mortgage however.

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+1 VG - the re-finance option doesn't really change the critical fact - being that your interest bill for the month was x amount.

Suppose your current repayment of $500 is 50:50 principal and interest, and you have another 10 years to go with repayments.

The bank offers you a refinance deal to stretch it out for 20 years, and reduce your repayment by $200. So next month you will pay $300 and from then on. But guess what, your interest bill is still $250, you're now only paying $50 off the principal.

So you're right in thinking if you tip the extra $200 in, you're back where you started, which begs the question why go into the re-finance to start with (especially if it's accompanied by a fee).

If you're a good saver with good discipline (ie a budget that you can stick to), I would recommend you start a line of credit type account. So your whole pay goes in, not just your $500 repayment, and you get the benefit of the smaller interest because your cash is sitting in there. And your expenses get paid out from there. But that's the discipline point, if you have none, you're going to end up spending more and eating into that $500 payment.

Make your repayments higher per month/fortnight/week or if you have any spare change, put it on the loan and redraw if need be.
Using a line of credit can also be very useful if you are; disciplined with money, know how to used it to it's full advantage and can pay it off within the 55 day period (or whatever the Credit Card period is).

Your bank should be offering you a rate substantially below the headline rate.
If not, threaten to go somewhere else.
Look at CUA, ME bank for alternatives.

You may find you can get a substantial interest cut without moving by threatening to leave.

DB008 said:

Make your repayments higher per month/fortnight/week ...

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Agree with you, Dannyboy!

My mortgage was with NAB.
At the time I was paid fortnightly.

They would not allow fortnightly repayments at that time.
So I deposited half the monthly repayment in an account each and every fortnight.
Everytime there was sufficient, an extra repayment was made.

It took many years off the term.

When setting up (or changing) the loan, one should always haggle over the terms with the lending institution, inparticular with the interest rate. This will drive the biggest savings. It's no different to haggling a better price for the property in the first case, a car or a large purchase from a retailer.

All fantastic advice people, thankyou.

Out of interest, has anyone seen what UBank is offering at the moment. Don't know if its worth me refinancing but I am definitely going to use it to haggle bankwest. Their comparison rate is 5.83% This includes a 0.20% discount which exists for the life of the loan regardless of any rate movements. Just a sweetner to get people into the door and they could stop offering that at any time.

To give you an idea of how much I am paying, BW list their comparison rate for their mortgage shredder home loan at 7.36% Its now painfully obvious to me I am paying TOO much for my home loan. Come in spinner lol.

I rang UBank to ask a few questions and they said they dont do new finance, only refinance and you have to have that mortgage with your existing bank for more than 6 months.

I'm doing the foolish thing and knocking down my white ant ridden house and building a new house. I know its not the right thing to do financially but I just want a nice house to live in. I am thinking of going with BW to borrow money to do this and then after 6 months check what UBank is offering again. If I can get BW to move on the interest rate in 6 months I will come back to this thread and update it. Mainly for anyone else thinking of doing the same.

One thing that really bugged me was my BW savings account. I swear the dreamsaver account was about 5% when I opened it. When I spoke to them on the phone they said "oh that account type is ancient!! we dont offer that anymore." Turns out it was only earning 0.05% I mean WTF! what is the point of that! I scrapped the account and now use my mortgage as a long term saver with my pay going into an offset type account.

So my lesson is: Ring your bank at least once a year and check interest rates on all accounts as they are subject to change with out you noticing. Actively ask if they have any other products that give better returns. I suspect they run the ol' bait and switch tactic. Lure you in with honeymoon rates then move that account type to the back burner and switch conditions. Then launch a new line of products with the good conditions. If you don't ask to change account types that's your fault!

Oh and just noticed... The Ubank thing is launched on the 11th of may, two days away yet. So fairly new product.

VeryGreen said:

So my lesson is: Ring your bank at least once a year and check interest rates on all accounts as they are subject to change with out you noticing.

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Better to check more frequently on their website. Most banks will have a heading for your accounts of "Account Details" for each a/c and this will show the rate.
I've been checking mine daily since the RBA rate drop in expectation of a fall in deposit rates. So far, none.

I sent an e-mail to BoQ (Bank of Queensland) regarding my interest rates and if a cut would be possible.

Short answer = too bad.

As soon as l can muster, l will be leaving BoQ for good and vow never to use their services again. Their customer service is good, but BoQ mortgage rates are high (compared to other lenders) and BoQ don't offer Qantas/Virgin/Singapore Frequent Flyer points on their Credit Cards either.

Oh, and the most recent interest cut didn't do jack, because BoQ hiked their rates last month, independent of the Reserve Bank and cut it just now, so l'm back to where l started.

Go to a mortgage broker who will assess your situation and find a better overall deal for you if there is one available. Will also handle all the work. If you have a substantial amount of debt they might be able to get the customer retention dept. to make a rate reduction.

Julia said:

Better to check more frequently on their website. Most banks will have a heading for your accounts of "Account Details" for each a/c and this will show the rate.
I've been checking mine daily since the RBA rate drop in expectation of a fall in deposit rates. So far, none.

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UBank certainly did - down to 5.51% now (and that's with the bonus interest).

They are still leading though (in terms of constant deposit rates) compared to others (you may see 6% on some but that's the introductory rate).

Love how "wholesale funding costs" are up but they can slash the full amount on deposits

Knobby22 said:

Your bank should be offering you a rate substantially below the headline rate.
If not, threaten to go somewhere else.
Look at CUA, ME bank for alternatives.

You may find you can get a substantial interest cut without moving by threatening to leave.

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Agree. Although not a mortgage, this happened with my credit cards. With my NAB card, I called up to close it and they were doing a lot to try to get me to keep it open, but alas, my ultimate goal was to close it, so as tempting as it was, I had to decline.

With Citibank, I actually called up to threaten to close my account if they did not offer me a promotional rate they were offering to new customers, lol. They gave in.

JTLP said:

They are still leading though (in terms of constant deposit rates) compared to others (you may see 6% on some but that's the introductory rate).

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You need to apply some pressure (see Tyler's post below) to have them renew the introductory rate. I've had it renewed multiple times now and am still getting 6% at call.

Love how "wholesale funding costs" are up but they can slash the full amount on deposits

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Their wholesale funding costs may well be up but most retail banks are still finding the need to be competitive with deposit rates.
Change your bank if necessary. No reason you can't have accounts with various institutions.

Tyler Durden said:

With Citibank, I actually called up to threaten to close my account if they did not offer me a promotional rate they were offering to new customers, lol. They gave in.

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Well done, Tyler.

I was walking to the shops today to get some veggies for dinner and I looked into the bendigo branch. I thought why not? Waltzed on in and asked if there was a home loan specialist available for a quick chat to a non-customer.

Let her know my situation and intention to demolish/build and she done a whole heap of maths which as you would expect was the same as my current lender.

I made sure I let her know that, and that I have been shopping around and it was about then she crossed off a whole lot of fee's and started talking about alternative home loan packages.

These guys a scrupulous lol. Reminds me of the first time I bought a car of a used car salesman. It went something along the lines of this:

Salesman: "Sorry I couldn't come down any lower on the price"
Me: "That's okay, sorry I couldn't come up. Once I have that hard limit set..."
**Shake hands and get up from his desk, walk to the door**
Salesman: "How would you like to pay the deposit?"

Everyone is out to get you!