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The Melbourne Cup rate hike might have surprised no one, but I hear constant shock when I tell people just how low they could make their mortgage repayments go.
Despite the 13 interest rate increases in 19 months, your mortgage interest rate should still start with a ‘5’.
There are still at least three loans on the market with variable rates under 6 per cent.Credit: Aresna Villanueva
The RBA puts the so-called discounted average variable rate at 7.06 per cent, likely 7.31 per cent shortly. Yet, even after most lenders pass on Tuesday’s 25 basis point rise, you will be able to get a quality home loan with a genuine offset account for an interest rate of 5.94 per cent.
In fact, you’ll be able to take your pick of at least three of them.
The lenders that will shortly (presumably) offer that rate are The Capricornia on its Country to Coast product, Community First Bank with its basic variable home loan and Tic:Toc’s variable home loan.
They were all charging just 5.69 per cent when rates rose. (Note that there are lower-priced products on the market but those I list are the cheapest backed by an authorised deposit-taking institution, which means money in offset is protected by the Australian government deposit guarantee).
While the rush has been on to refinance since the Reserve Bank began this painful hike-cycle, in the last month for which we have figures, it dropped to almost the lowest level in a year.
Two factors were possibly at play. One is that the RBA had paused the repayment pain for four months – cue optimism it was over.
But the second factor is probably that borrowers either doubted they would be approved or had already been rejected for re-finances. So let’s look at that.
What you need to know in light of the Reserve’s resumption of increases is that the doors to mortgage prison were unlocked somewhat several months ago.
Right now, your number one priority is very likely getting those mortgage repayments down.
The regulator saw the silliness of a situation where people contending with higher repayments were deemed unsuitable for a lower-priced product.
The previous 300 basis-point interest-rate stress test was accordingly relaxed. Just how, then, do you now position yourself for approval?
Step 1 – HEM your spend.
You need squeaky-clean spending habits for the three months before you apply for a mortgage. The chances are that by virtue of, well, virtually no spare money, you already tick this box.
This is the “Netflix test” but most lenders use your actual spend or a measure of average spending for your circumstances called the household expenditure measure (HEM). They’ll take whichever is the higher, so hibernating won’t necessarily help.
Step 2: Sort your credit score.
Australia’s three main credit bureaux now must provide you with a free credit report and score every three months. These three credit bureaux are Experian, Illion and Equifax.
Ludicrously, the score scale is different across them, but you want it to be “good” or better.
An easy fix is to find and correct any mistakes. But it could take you up to two years to remove any tardy credit repayments – you have just 14 days’ grace before these are listed on your report… and hurt your score for two years.
It’s 90 days with any other types of bills, but this transgression will suppress your score for five years. Hopefully you are a model money citizen, because you need to be at the precise moment a potential mortgage issuer checks.
Step 3: Cut your credit limit
Not many people know about this one, but it’s a fast way to get the fat in your finances that you need to be approved.
What a lender is looking for in essence, is clear space between your income and your expenses, clear enough to afford their repayments with a bit of a buffer (that relaxed stress test). And your mortgage expenses as a function of the interest rate hikes will be higher.
But here’s the rub: you will need enough income capacity to repay any credit limits within three years. Even if your balance is currently zero.
If you have a $10,000 limit, it will rule out $380 of your pay each month (it’s mostly your card limit x 0.038). Even though that may be theoretical only.
As such, you may very well have to cut your card limit. But right now, your number one priority is very likely getting those mortgage repayments down.
Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me. Follow Nicole on Facebook, Twitter or 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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