Most people’s mortgage will be in their lives for at least 30 years, especially when you factor in renovation expenses, natural lifestyle evolutions such as career breaks/starting a family or using your home for debt-recycling investment strategies.
Which means the cumulative cost of interest can be staggering. For example, if your mortgage is $500,000 and you are on a 30-year term, with an average interest rate of 5% p.a. you will pay over $466,000 in interest alone, throughout the duration of the loan. This means you’re paying 93% of your initial mortgage on interest!
It is vital to choose the right mortgage early on, because even the smallest changes to your mortgage (that may seem insignificant in the moment), can dramatically impact the overall cost and time it takes to pay off your mortgage. You could potentially save hundreds of thousands of dollars in interest and reduce years off your home loan.
So how do you pick the right mortgage? When Tom and I purchased our new home, we set a goal to pay off our mortgage before the bank’s predicted timeframe. For both of us, it is really important that we don’t become slaves to our mortgage. Incurring pro-longed mortgage expenses can hold us back from achieving our other personal and financial goals, such as travel, career changes and being able to retire at age 60.
When we started looking for our dream home, there were 5 key requirements we had when taking out our home loan to ensure it aligns with our life and financial goals.
1) PRINCIPAL & INTEREST – Interest only loans are initially tempting because they make repayments appear more affordable. But for most people this comes with deep regret, typically five years after the interest rate expires, when you realise your debt hasn’t actually come down and you are 5 years older. In the long run you pay so much more interest fees. For this reason, our home loan is P&I.
If you are living in the house that you have a mortgage on, (i.e. your PPR) it is important that you are paying off your mortgage using a P&I loan, so you don’t waste valuable time and money. Right now we are in a record low interest rate environment, so the change in repayments in going from IO to P&I, should be manageable, especially with low home loans rates, like what Athena has at 2.19% p.a.
2) THE REAL INTEREST RATE – Never get mislead by only looking at the top line interest rate, you need to look at the comparison rate. This represents the real cost of the loan, because it includes all the additional hidden charges. Sometimes loan providers will have a low interest rate, but then the comparison rate is far higher. This is a common trap, because you end up paying more than you expect and take longer to repay the mortgage.
Look for a low comparison rate as a good benchmark. I recommend compare interest rates against Athena’s comparison rate of 2.19%, which is so low because they don’t have any fees and changes. What you see is exactly what you get.
3) LOYAL LOVE – One of my pet peeves is seeing a special low introductory rate for new customers, whilst existing customers pay a higher rate. This is unfair because you are ultimately being financially penalised for your loyalty.
I recommend, looking for a home loan provider that has the same rates for both new and existing customers – extending special offers to everyone. Athena’s rates are the same for all existing and new customers – they call it their “automatic-rate” match.
4) FLEXIBILITY – When you take out your mortgage, don’t go on “auto pilot mode”. Have some financial goals around paying off certain amounts by specific deadlines. For this reason, it is important that your mortgage is flexible. Remember our life is constantly evolving, so make sure your mortgage can be adjusted with your circumstances.
Whether it’s making extra repayments through ad hoc lump sum repayments, increasing your fortnightly/monthly repayments, the option to fix all or part of your loan and a redraw facility option to keep your emergency money safe and save you interest in the meantime.
5) SHARE THE LOVE – You want your home loan provider to share the love when it comes to interest rate cuts and ideally as quickly as possible. The RBA cut interest rates to help everyday Australians manage their financial responsibilities, so why should your loan provider keep these savings (and profit) for themselves?
When looking at providers, ask them if they pass the interest rate cuts onto new AND existing customers in full, and how quickly. The RBA has dropped the cash rate 6 times in the last 24 months. Interestingly, Athena has dropped their interest rate 7 times during this same period, with a total interest rate reduction of 1.4% (from 3.59% to 2.19% for LVR <60%).
If you are serious about being mortgage free like Tom and I, make sure you use this low interest rate environment to set or review your debt free goals, home loan strategy and products. And as a great place or point of reference to get you started, head to Athena’s website now.
Canna Campbell is the founder and director of SASS Financial Services, a boutique financial planning firm. She is Channel 9’s exclusive ‘money expert’, founder of financial media platform SugarMamma.TV and best selling author of The $1000 Project and Mindful Money.