Dev Raga Personal Finance Podcast - Episode 2: Mortgage Tips and Tricks
This is a summary of the Dev Raga Personal Finance Podcast - The original podcast can be found here: Episode 2 - Mortgage tips and tricks by Dev Raga Personal Finance • A podcast on Anchor
Please Note: The material on this site, and in the podcast, is purely for educational purposes only. It is not intended to be financial advice. If you need advice regarding your personal financial circumstances, please see a financial advisor or financial planner. Please read the full disclaimer here before participating in this thread
Although owning a home is a part of the Australian dream, we have some of the most expensive homes in the world. It is becoming increasingly more difficult to achieve this dream, especially for young Australians and people seeking to live in a metropolitan area (e.g., Sydney and Melbourne). Nonetheless, there are bargains available if you look hard enough. In this podcast, I will be discussing some basic home loan tips which you may find useful, especially if you currently have a mortgage and wish to pay it down as quickly as possible or are interested in getting a mortgage.
**Disclaimer: I am not a financial advisor, nor do I seek to sell anything; I am a doctor doing this podcast out of my personal interest. I hope you find this entertaining and informative, but I suggest you get your own financial advisor for formal advice.**
1) The power of making repayments at a higher interest rate
Interest rates have been at a record low recently in Australia.
But as time went on, the variable interest rate was reduced to less than 4%. As a result, my payment could have been reduced to $2783. However, paying the original repayment would save around 15 years’ worth of mortgage. Paying the initial repayment, if you can still afford it, could save several years’ worth of mortgage even if the interest rate decreases. This also creates a buffering layer in case of emergencies as you can draw on the extra amount you paid as part of an emergency fund.When I bought a house in 2010, the average interest rate for mortgages was 7-8% so the monthly repayment on a 30-year mortgage of $500,000 was $3603.
2) Make frequent mortgage repayments
Paying fortnightly repayments means you pay an extra months’ worth of repayment in a single year. There are 26 fortnights in a year, which is equivalent to 13 months so you can make an additional monthly payment without feeling significant stress on your disposable income. Since finance is largely behavioural, you want a sustainable solution whereby you can do something repeatedly with little effort, which can be achieved by automating mortgage payments. (This is linked to my first podcast about the power of automation.) However, this only works if you have enough money to pay every two weeks, as do some health professionals who get paid fortnightly.
3) Always have a mortgage offset account
This saves the amount of interest you have to pay.The mortgage offset account was originally designed to enable easy access to your money while offsetting it against the interest payable for your mortgage.
If you have a mortgage of $300,000 and had $50,000 in your offset account, you would only need to pay interest on $250,000. If you didn’t have a mortgage offset account and the $50,000 was instead in your savings account, you would need to pay interest on the whole $300,000.
This is equivalent to a guaranteed return on your money (which is also tax-free) while you still have access to the $50,000 for rainy-day emergencies. You just have to make sure that your offset account is 100% offset (i.e., 100% of the funds in your offset account are used to offset your mortgage). If you want to invest the amount in the offset account somewhere else and you seek to make your home an investment property, you can claim all the deductions from a tax perspective for all the interest you paid. With its significant advantages, I recommend talking to your accountant or financial advisor about it.If the interest rate was 5% p.a., you would save $2,500 annually.
4) Keep looking for a better deal/rate
Even if you have a pretty good deal at the moment, in twelve months it may not be the best deal available. I recommend talking to your bank manager or mortgage broker every 6-12 months to ensure your current deal is the best around. This does not necessarily mean the lowest interest rate, but the interest rate and mortgage contract most suitable for you and your family.
Even if you have the best rate, it is important to make banks ‘sweat’ because they make a lot of money and Australian banks are some of the most profitable industries in the world. There is no need for you to pay more than what is required, so you need to let them know that you are looking for better deals and that they need to pay for your loyalty.I have a personal business manager who I can email, but if this is not available to you it is important that you have someone who you can visit or chat at a local branch.
5) Fees, fees, fees
Make sure your fees are as low as possible and avoid any obvious penalties for switching home loans as well as hidden fees. Australian banks are notorious for charging fees, and fees can incur from changing rates, repayments, and offsets as well as several other things. It is your responsibility to understand all the fees associated with your mortgage. (And honestly, it is reasonable to say that you will go to another bank/mortgage broker if you are charged those fees.) As a customer paying interest for the amount that you borrow, you are in a position of power, so you should try to reduce your fees as much as possible.
6) Professional discounts
Certain professionals are eligible for discounts.
Don’t believe what banks advertise as the lowest rate and ask for a lower rate as well as any professional discounts you are eligible for. There is no harm in looking for better rates.Doctors (i.e. members of the RACGP, RACS and ANZCA, etc.), as well as other professionals like engineers, are eligible for discounts.
The first podcast was about saving money and automating this process to harness the power of compounding, and this podcast was about some tips and tricks for people who already have a mortgage or are looking for one and want to maximise their mortgage incentives. These two things go hand-in-hand because by saving 20% of your net income and investing it for your future, and at the same time paying off your mortgage as quickly as possible, you are setting yourself up very well for the future.