Are You Mortgage Smart, Or Just Another One Of The Banks Sheep?By Dave Fleming : 19 November, 2018
How did we get into this Mess Anyway?
It’s been over eight years (how time flies) since the Global Financial Crisis made its presence felt. Initially Australia looked like it was going to be immune to its effects, or so a lot of people thought. However, we all now know that’s not the real world we live in. The real world we’re now living in here in Australia is a world that has been economically affected by the financial status of the countries we trade with.
In simplistic terms if people in America aren’t buying new houses then they’re also not buying all the furnishings that go with those houses, such as white goods etc. If they’re not buying those then manufacturers are not making them. I think you get the gist of what I’m trying to say.
If people in first world countries are not buying, then the economies of manufacturing countries like China, Japan and India go backwards. When they start going backwards they stop buying coal and other resources like iron ore.
Why Have the Banks Been Immune to all of this?
That’s why we had a two speed economy that everyone marveled at. Fast and average were the two speeds we had. What we have currently is average and slow. Now the mining boom is over for the time being our economy is going to continue to struggle until the global economy starts to hum again.
It seems the only industry that is not bemoaning its fate is the banking industry in Australia. They continue to make record profits off of the back of hard working Australians. The four major banks in Australia continue to make record profits year after year.
Even though the Government outlawed exit fees on home loans, lenders have come up with new and innovative ways to ensure that their profits continue to increase. These strategies include increasing interest rates out of sync. This means, when the Reserve Bank of Australia’s (RBA) rate increases, the banks have in some instances increased their rates even more and also have not been passing on all of the rate cuts when announced to maintaining ridiculously high credit card interest rates.
When does the Rip Off Stop?
Their ongoing justification for this outrageous profit plundering is that Australia needs a profitable banking system to maintain a strong balanced economy. Well, how much is enough? When does this flagrant profit gouging stop.
At the moment the Federal Government has been a running a ‘Show Tribunal’. They lined up the boss’s of the big four banks and then fired some tepid questions at them, which made a couple of them squirm uncomfortably a little bit in their seats. What’s going to come out of that, not much? We may see one or two minor concessions, but that won’t slow the banks profit increases down.
What can You do About it?
Unless we take personal responsibility for our own finances, we are always going to be stressed out with the banking system and trying to pay off our mortgages.
In the current market interest rates are at an all time low and some economists are predicting they could even go lower. Some say as soon as next month. In this financial environment it behooves anyone who wants to get ahead financially to start working their finances a lot smarter.
The principal and interest repayments on a 3.64% (yes you can get an owner occupied home loan (<80% LVR) with an offset account at 3.64%) $500,000 30 year owner occupied home loan are $2,284 a month. We all know that the majority of that repayment amount for the first 15 years is going to go to the bank in interest. Did you also know that over the last 30-40 years home loan interest rates have averaged around 7.5% to 8.5%? Many current older home owners will remember back to the late eighties and early nineties when home loan rates were 17.5 – 19.5%.
Which Would You Prefer – pay Yourself or Pay the Bank?
So, what I’m saying is home loan rates will inevitably raise again. However, when they get to 7.64% the majority of that payment will be going to the bank. If you allow that to happen, you will always be at the beck and call of the banks.
What we’re suggesting is that you tighten your mortgage belt, get the budget spreadsheet out and (I know, it’s a pain, but there is no other way) start figuring out how you can fit a 7.5% principal and interest mortgage repayment into your budget.
A 7.5% principal and interest mortgage repayment on a $500,000 home loan would amount to $3,578 a month. Yes that’s about $1,200 a month more than you’re paying now. The real decision is, do you pay yourself now or pay the bank later?
Because, inevitably interest rates will rise and when they do you will be forced to pay those amounts. Notwithstanding when it does most of the repayment will be going into the banks back pocket.
How Well Could You do?
The good news is, if you do activate this strategy you will pay your thirty year mortgage off in 15 years and two months. In other words you would lop off an enormous 14 years and two months off your 30 year mortgage and in the process save an astounding potential $170,986 in interest.
Imagine, if fifteen years from now you didn’t have a mortgage as opposed to being locked into the bank for the rest of your life. The choice is, you either pay now or you pay later.
There’s an old saying that says ‘You Should Never Look A Gift Horse In The Mouth’. What does that mean, I really don’t know. I think it has something to do with not being ungrateful when you’re handed a gift.
Nonetheless, the point is interest rates are at historic lows which provides an opportunity that may never been seen again. Or, if it does come again it will probably be a long time coming.
If you want information on more strategies that will help you pay your mortgage off faster or to create more wealth through mortgages and property, please get in contact.
If you don’t have a 3 in front of your owner occupied home loan interest rate these days, then you’re paying too much for your home loan.
About About Dave Fleming
Dave is enthusiastic and fascinated by the digital and social media worlds. He is passionate and enjoys entrepreneurial pursuits, wealth creation financial strategies, health, fitness as well as cooking. Dave is the webmaster at www.mastermortgagebrokersydney.com.au, which is an information website pertaining to loans. He has a deep commitment towards writing about and helping people understand the basics of how the financial world works.