At Empower Wealth we are passionate about providing practical education that helps our community at every step of their financial journey.
We want to ensure that no money is left on the table, and one of the biggest money pits we’ve found is the interest we pay on our mortgages. So in this video, Ben explains six lessons that every borrower should know about if their fixed rate is about to expire. Enjoy!
Here are the timestamps:
0:27 – Introduction 2:41 – Lesson 1: Lenders Do Go on Sale 5:14 – Lesson 2: Fixed to Variable – Not Best Deal 7:27 – Lesson 3: Discount Ranges Are Misleading 11:25 – Lesson 4: Published Rates Are Negotiable 13:46 – Lesson 5: Complexity is Real 17:40 – Lesson 6: New Borrowers get Better Deals 21:30 – Recap
p.s. Keen to get your mortgage reviewed? That’s great news! Simply speak to your bank or your current mortgage broker. Alternatively, if you’d like some additional help or a second opinion, we are more than happy to have a chat with you! Learn more about our Free Mortgage Review here.
p.p.s. Moorr is our online platform that helps people get on top of their money habits, The Property Couch is our free educational podcast that provides helpful content to our community and Empower Wealth is our multi-award-winning advisory business that works directly with those who want qualified professionals, helping them with their financial needs.
Hi, Ben Kingsley here, and I’m super excited about our new series that we’re doing for the Moorr Lifestyle by Design Platform, where you can achieve more with Moorr. Now, this series [is called] Don’t Leave Your Money on the Table.
If any of you know about me and my role on the podcast, The Property Couch, I’m passionate about making sure that people don’t leave their money on the table and that their money’s working harder for them, and so this series is about looking at ways to help you optimise your money, your finances so they work harder for you, because we all know that you work so hard to earn that money, [so] why not make that money work harder for you? Now, in this very first episode, we’re going to be focusing on expired fixed rate loan periods. This is all the news, right?
Fantastic for all of you people who have big credit, went and got fixed-rate loans when you did because you’ve won. You’ve done a great job in being able to get really cheap interest rates during that fixed period, but what would be a shame is what you do next. Like you’ve saved up all of that extra interest, which you’ve now put into offsets or you paid the loan down quicker thanks to that super cheap interest rate you got with your fixed-rate period, but these lessons, these six lessons that I’m talking about today is all about what we do next.
Let’s have a look at these lessons in terms of what we’re going to be focusing in on.
Lesson number one, lenders do go on sale, so we’ll talk more about that.
Lesson number two, fixed to variable rates [do] not necessarily give you the best deals. I’m really excited about talking about that one. Discount ranges can be misleading from lender to lender. Published rates are negotiable. In terms of complexity, it is real.
It is getting harder and harder to compare different loans, and we’ll learn more about that through this area, and then finally, point number six, probably the biggest takeaway lesson here is new borrowers get better deals than existing borrowers, and I’ll show you some proof around that as well. Let’s get into it. It’s an exciting series. I’m delighted to be able to be sharing this knowledge with you.
Lesson number one is lenders do go on sale.
Now, to understand this concept, you need to get behind the purpose of the bank. Now, the purpose of the bank is to obviously lend money out of which they make profits. Banks make their profits from interest and fees that they charge, and ultimately, they’re making profits for their shareholders, their investors. Now, why would a bank go on sale? Well, it’s really, really clear why they would, so let’s take a look at why they would go on sale.
Now, to use this and to best illustrate this, here is the CBA Half Year Results presentation that they would deliver to their shareholders. Now, the big challenge for our lenders is all about growing their loan books. Lenders will continue to grow this loan book, and you can see here CBA is doing a very good job of growing their loan book, so that’s one way. You get more loans and you make more profits from those loans. In addition to that, we also need to have a look at what else they do in terms of how they make their money.
Now, they make their money off their margins, okay? This is called net interest margin. Now, the idea behind this is you can see 209 basis points or BPS. That is the margin that they’re making, from the cost of the money to basically what they sell that money for. You can see there are different things that are putting pressure on those margins, and so those margins are going down, so if margins are going down, but they obviously then need to grow their loan book size, so the message here is really, really simple.
In terms of we come back to the point, let’s go back and sort of bring that message home, is that they need to increase their loan book. That’s how they help build profits because there is pressure on their margins. Now, from our point of view, that’s a good thing if there’s pressure on their margins because what’s effectively happening is we’re getting better deals. It means that those interest rates that they’re going to be charging us are going to be cheaper, so that’s why banks do go on sale, so if one big bank is losing market share, then they potentially go on sale and they offer all of those types of incentives, such as cashbacks, but also very attractive rates for periods of time. That’s lesson number one.
Let’s move to lesson number two.
We move across here in this great tool that we’ve got, and we can talk about fixed to variable, not the best deal. Now, I have to explain this to people because this is, again, not necessarily commonly known, but let’s say we take out a $500,000 loan, okay, and we’re going to take out, back in the day, we got a great deal, so we got a 2.29% three-year fixed rate. Now, when we negotiated that, all we were focused on was that 2.29% interest rate. Now, after that period, we then need to find out what happens, so what is the variable rate that we’re going to be able to get?
Now, usually, what would happen here is you might get, say a 1.75% discount after that period. That’s the potential discount that you’ll get. Now, that’s off the standard variable rate, so we need to understand. I’ll be doing some more teaching on this standard variable rate, so that’s the highest rate. That might be the discount that you’re getting off that.
Now, what’s happening here is that’s what it looks like. However, if you have just negotiated a variable rate upfront, what would the bank have given you or the lender have given you? In some cases, they may have given you a 2% discount off that particular rate, so if they’ve given you a 2% discount, then ultimately, that’s a better deal. You roll off this fixed-rate period, and this is about what you have to do next. You may not have the most competitive variable rate for the remainder of your loan term, so that is an excellent reason why you need to see after that fixed period, “What is your competitive variable rate at that time?,” because if you’re outside the market, here we are again. Your money’s not doing the heavy lifting that it should be for you, so let’s get the best deal, otherwise, we’re paying the banks those profits that we see them making.
That is lesson number two in regards to fixed to variable. That transition is not necessarily the way in which you can potentially get the best, longer-term discount.
Okay, let’s head to lesson number three.
This lesson is all about discount ranges and how they can be misleading. Now, what you might hear at the local barbecue or something like that when we are talking about interest rates, people will talk about, “Oh, well, I’ve got a 2% discount.” Now, I’ve been a mortgage broker since 2004, and I can tell you the discount rates that we used to see on a $250,000 loan, we would see discounts of around 0.7 of 1%.
If it was below that, remember, obviously house prices were a lot cheaper back in 2004, we’d see if you had greater than 150,000, you would standardly get a 0.5 discount off the standard variable rate. Now, this is the important point here, not every lender is playing fair, and this is my point about misleading rates, so let’s go and have a look now at what I’m talking about here. I’ve just got two major lenders. Again, I’m coming back to the CBA, and you can see here that the CBA standard variable rate is, the comparison rate is 5.5. The interest rate that they’re looking at is 5.1, so that is their standard variable rate. Now, if I take a different example, where I move across and have a look at, say, Bank of Melbourne as an example, we can see here, let’s go to full screen, we can see here with Bank of Melbourne, you can see here that their standard variable rate for principal-and-interest is 6.37.
Now, that standard variable rate at 6.37 is significantly higher than the CBA rate, so if people are at their barbecue and they’re talking about, “Oh, I’ve got an X discount in terms of my discount these days,” that was the old days.” Now, we’re sort of starting to see discounts very much in that sort of one to 2% range, and if you’re borrowing a significant amount of money, we’ve seen discounts as high as 2.95% of some lenders, but what does that really mean? My point being is if people are telling you at their barbecues or at the catchups or at the dinner parties, “I’ve got a 2.95 discount off my loan,” it’s misleading, because again, if CBA, in the example that we use, has a significantly cheaper standard variable rate than what the Bank of Melbourne are saying in terms of their standard variable rate. The message here is really, really simple. It’s not so much about the discount, so the discount is important, but it’s really about the ultimate rate that you’re going to pay, and it’s that final rate in terms of that calculation when you’re releasing that …
Off the standard variable, if you’ve got a standard variable of say 6.25%, and you’re taking 2% off that, then that brings you down to 4.25% interest rate. If you’ve got, say a 5.3% interest rate with a different bank, which we just saw, and they’re giving you a 1.25% discount, all of a sudden here, you’re sitting at 4.05, so even though this was the bigger discount, this is the better rate. I think that’s the message here that most people need to understand. Discounts can be misleading. Ultimately, it’s the final rate that you pay is going to be what value you get. That is an important lesson in terms of lesson number three.
Let’s go over now and have a look at lesson number four, where we start to talk about the published rate, and in here, it is negotiable. Now, again, being someone who’s been a broker since 2004, the published rates that we’ve just seen on the websites are definitely there, but we do know that you can negotiate those rates, so if you are not negotiating those rates, then you’re not doing the best for your own personal circumstances. It’s absolutely critical that you negotiate off what I consider the retail rates. You should never pay retail when it comes to mortgage lending. You should always try and get yourself the very, very best deal.
Now, this is always difficult for some people, because what we’ve just seen is some situations where it’s very hard to compare the pair, and ultimately unless we look at the final interest rates on offer, but what I can tell you also as a broker is that over the years, you can see a lot of different lenders going on sale, coming off sale, and you do have the full scope of all the different options, so if I’m picking from, say 45 lenders, it’s a lot easier for me. If I’m doing this with 45 lenders and I’m doing this full-time, ultimately, I’m potentially in a better position to understand what are the rates, and you also hear about people giving you pricing requests. When you’re working with an investment savvy or a mortgage savvy mortgage broker, that pricing request is always going to be part of what they’re doing. We very rarely accept published rates. We’re always trying to make sure that we’re getting better for you, and that’s our job. Ultimately, as a mortgage broker, we get paid by the lenders, yes, but we absolutely work on your behalf.
Through those 45 lenders that we have, ultimately, we have two big things. We have choices for our clients, and also we can negotiate great deals in terms of what’s available for you. Those great deals come through that knowledge of all of those different lender comparisons. Don’t accept the published rate. Always negotiate is lesson number four.
Moving along now to lesson number five, complexity is real. I’ve just started touching on how complexity is real in terms of what we’ve just seen. Coming back to my 2004, starting in broking, it was actually quite easy. We would have principal-and-interest lending or interest-only lending in terms of, and we would have a rate that was set for principal-and-interest, and then interest-only was just a term, so you didn’t have to worry too much about that. You had fixed rates as well.
Everything was relatively smooth when it came to looking after that. The world has changed tremendously now, where we’ve got owner-occupier, and also now investor lending, okay? Now, you have principal-and-interest attached to owner-occupier. Then, you have interest-only attached to owner-occupier, and that means that’s a higher rate if it’s interest-only versus being principal-and-interest. In addition to that now for investors, there is a higher rate again for investors in terms of interest-only and principal-and-interest, so they pay a higher rate than owner-occupiers do.
Don’t get me started on that. There’s no reason for it. It is profit-grabbing. It’s about getting that margin up, okay, because really, investors are just as good a lender as owner-occupiers. In fact, there’s a lot of research out there that says that investors don’t default as much as owner-occupiers do, so another story there.
We see, again, higher rates for investors, and we also have interest-only, which is again, a higher rate on top of that also. Now, that is just the start of the complexity, so all of a sudden now, let’s start to introduce loan-to-value ratios. Loan-to-value ratios, if you’re less than or equal to 60% in terms of your peak debt, the debt that you’re taking out, what’s actually happening here is that will be a cheaper rate, and then if you were, say up to 80% loan-to-value ratio, and that rate will be cheaper again. It’ll be cheaper than anything that is 90 plus per cent, so anytime you go greater than that 80% or equal to that 80% or less than, all of these rates start to go up or down, or down or up. It’s very, very confusing, so you need to be able to understand what’s basically happening from lender to lender in regards to all these different rates.
You only need to go back onto the websites where you can see like … Actually, let’s do that. Let’s go back and have a look, as a good example here, and let’s go and have a look at the Bank of Melbourne as again. Let’s go down to their home loan section, and we can see here how much you’re going to borrow. What sort of deposit are you going to be bringing in, in terms of, is it 20% more than that? so then, you’re trying to work out your loan-to-value ratio. Is it owner-occupier versus investing? Is it principal-and-interest versus interest-only?
All of those things will matter when it comes to trying to calculate an interest rate, so it really does highlight that it is getting more and more complex when it comes to trying to find the best deal. Now, in addition to that, if you’re thinking about investing, in some cases, the interest rate may be important, but it may not be as important as actually getting the borrowing power and being able to complete the deal as part of that story as well. Lesson number five is complexity is real.
You need to be able to work your way through that complexity, and if you can, that’s terrific because there are savings, potentially thousands or tens of thousands of dollars if you keep tension on the best interest rates of the day.
Now, moving across to lesson number six, new borrowers get great deals.
Now, there’s no better way to illustrate this than this particular chart here, which comes from the Reserve Bank of Australia, so let’s have a look at this. This is effectively what we’re talking about when it comes to new versus existing customers. It doesn’t get any clearer, outstanding loans versus those new loans, you can see that the rate that is being paid for new business, so that’s the banks and lenders buying a business versus the existing loans.
Why is that? The reason for that is really clear. It’s people coming off fixed-rate loans. What I was telling you before, that the discounts that they may have got in that time, those discounts are slowly moving out of the competitive market and competition is fierce. Absolutely fierce.
Let’s go past the business rates and let’s come down here and have a look at the rates table. This is the rates table that has been prepared by APRA and the RBA, and we can see here clearly, here we go, owner-occupier, principal-and-interest, who’s getting the better deal, the outstanding loans versus the new loans, interest-only. Still, again, you’re paying more for interest-only, investment loans, principal-and-interest, interest-only. Now, they’re not also factoring in the loan-to-value ratio complexity that we just talked about, but you’re starting to see a story here, and that is a pattern, and that’s why this particular episode is so important, and I’ve got so much interest and passion in it is because ultimately, what we’re talking about here is getting you a better deal, and there is no better time for you to start thinking about better deals than a prompting of your fixed straight loan rolling over to variable. That is a good time, as any, to potentially start to look at what you can do and do a review of your loan. The big takeaway here for me is absolutely review.
It’s so important that you keep an eye on this in terms of helping you and your family save money, especially in these times. If you’re not feeling confident enough to work through that complexity, can I give you a recommendation? That recommendation should be get a mortgage broker to be able to do that. Of course, remember, more is about achieving more with more, and that review is going to be really important for you. It’s completely free to ask a mortgage broker to review your situation. They’ll obviously need to see the full story to make sure that you’re capable of refinancing or looking for that better deal because what is going to happen is the first step is usually going back to your same lender and saying, “Hey, will you give me a cheaper rate?”
Now, their retention teams, their job is to try and hold that margin, remember? I mean, banks are trying to make a profit for their shareholders, and that margin that we saw in CBA, that story there, that makes it more difficult for them, so the first instinct is not necessarily giving you the absolute best deal, but if a broker’s doing it, they know exactly the last best deal they got from that lender, and they’re expecting that lender to potentially give them the same time because they’re willing to negotiate on your behalf, so it’s really, really important that you look to review that, and there is no better time to make that revision and that review as part of what you’re doing. If we think about all the things we’ve been talking about, lesson five, lesson four, lesson three, let’s go through them in terms of what we’ve been talking about, it’s really, really clear that these things matter, okay? Let’s bring this up into a larger size. Lenders do go on sale.
Just because you think you’ve got a good deal two or three years ago, you just saw that there might even be cheaper or bigger discounts out there, fixed to variable, always the discount on the variable is never as high as what you can if you just go pure variable at the time of getting your pricing request, discount ranges are misleading. We demonstrated that. Published rates are negotiable. Either you do it or you get someone to do it for you. Complexity is there.
It is going to be a bit of overwhelm if you’re not familiar with this. If this is not what you’re doing every day, that is going to be real, and we just saw really clearly that new borrowers get better deals than old borrowers.
For me, coming back to the episode, what to do next, there are a couple of choices, reach out to your bank, try and get the best opportunity from them, and then compare that to what is in the market, and if you can’t do that, use a broker.
If you want to use one of our brokers, it’s really simple to do that. You can click on the link that’s attached to this video, and you can potentially organise a free consultation with one of our brokers.
You’ve got nothing to lose and everything to gain because remember, time is your best investment. Your time is important, but this is money that you’re leaving on the table. Coming back to what we’re passionate about is don’t leave that money on the table. That is what more is here to do. You want to be able to achieve more with more, and we’ve been able to identify that there’s potentially an opportunity here for you.
With that information, don’t leave that money on the table, make your money work harder for you, and if you need help from one of our professional advisors, we can do that for you. I hope you found this first episode in the series of interest to you. I’m looking forward to producing more of these in terms of saving money, making money, and those types of things as part of our beautiful Moorr community, so thanks again for watching, and remember, knowledge is empowering, but only if you act on it.
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