Three ways to cut your mortgage repayments without refinancing

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Last week’s rate hikes turned the mortgage screws all the way up to 4 per cent. Moreover, what’s vital to realise is, to be approved for a home loan in the first place, you must show you can handle a 3 per cent tightening – the required income stress test.

So, the fat in most borrowers’ finances is well and truly gone and the repayment pain is now real and far-reaching.

With the fat in most borrowers’ finances is well and truly gone and the repayment pain now real and far-reaching, here are some methods to try cutting your repayments.Credit: Dionne Gain

But the fact the RBA’s moves have surpassed the necessary loan buffer has another truly terrible consequence: many people who are paying over the odds can’t do anything about it.

They don’t have the surplus income anymore to get even a cheaper home loan over the line.

That’s what that scary term “mortgage prison” refers to. Though they may want to, they can no longer leave.

But all is not lost, there are ways to cut your repayments without having to refinance.

Here are the easiest to the most extreme – but effective.

Hike fight one: Don’t miss that it’s not the RBA that determines what you pay; your lender does, usually by reference to their interest rate at the time your loan began. Any movements since then will – more or less – have reflected our central bank’s hikes, holds or cuts.

But your lender’s rate may not have been the best in the first place.

And the quickest, simplest way of slashing your monthly outlay is to secure an interest rate discount. Try my two-pronged approach.

Firstly, call your lender and tell them you know that there are still quality loans with genuine offset accounts with an interest rate of 5.54 per cent… after this latest rate rise. Meanwhile, data house Mozo says the average for a comparable loan (for 80 per cent of a property’s value) will soon be 6.81 per cent across the market and 7.03 per cent from the big four. Yep, 127 basis points – and more – higher. Ask what your lender is prepared to do to keep your business.

If that doesn’t work, indicate your intention to refinance by filling out what’s called a mortgage discharge form, or some such, which you will find online, or your lender can send you.

On this, you indicate a rival lender to which you will move your loan – those that will likely be charging the 5.54 per cent mentioned above are Easy Street and Police Bank – and the date that will happen. It’s a no-negotiation-necessary technique to get your lender to reveal its best possible loan offer. You just wait and see what they say.

You have nothing to lose – without a new lender lined up to pay out your existing one, your mortgage will simply remain as it is.

Don’t miss that both of these strategies are predicated on your lender believing you can leave. It will have no idea otherwise as this insight would require a fresh serviceability assessment.

If you highly suspect that, since you were originally approved, so much of your income has been sucked up that you are stuck, don’t tell them!

Hike fight two: If you’re more than a few years into your loan, it’s very possible you’ve paid down a chunk of it.

Even so, you are contractually obliged to make the same minimum payments each month. Unless you change that contract.

Now, lenders – even your existing one – do have to do a fresh serviceability assessment if you make material changes to your loan.

But with a lower new loan amount and a longer new loan term, you might pass that 3 per cent income stress test with flying colours. It’s worth a shot. Once more, you have nothing to lose.

Such a move would effectively re-amortise or spread a smaller loan balance across a fresh, 25- or 30-year loan term, which should dramatically slash your monthly repayments.

Indeed, under those circumstances, you may even have a sufficient income buffer to switch to a new, cheaper lender – one of those charging only 5.54 per cent.

Hike fight three: Your mortgage payments may be already too stretched. Or that your dirt-cheap fixed rate is about to finish, and you’re staring up at that budgetary cliff that’s going to be impossible to climb.

I recommend strategies one and two to you. But if they are too little, or it’s too late, lenders are urging you to tell them you are in trouble and ask for hardship provisions – before you default and risk your home.

Today, the raft of concessions emanating from confessions include repayment pauses, reductions on the minimum required and interest-only arrangements to give you breathing space.

You may even get an interest rate discount, at least for a time, à la Hike Fight one.

If you have a typical $600,000 mortgage and this move has the effect of cutting your interest rate from a big four new average of 7.03 per cent to the market-leading (probably) 5.54 per cent, it will save you $554 a month.

Which feeds and funds a lot more of life.

• 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.

Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me. Follow Nicole on Facebook, Twitter or Instagram.

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