by Scott Pape -
SOME people dream of buying a home. Not me – I dream of owning my own home. I’ve got a mate who swears that the grass feels different under your (bare) feet when you make that last repayment.
Till now, most people haven’t had to worry about paying off their homes – the breathtaking growth in property has done all the heavy lifting for us. But those days are long gone.
Anyone buying a home today is taking on a bloody big commitment – and therefore every little bit you can save helps. So, here’s a way to save yourself a lot of money – and a lot of time.
Step 1
First, go to the fridge, get a beer, and relax – this is going to be easier than you think. If you’re like most homebuyers by now you’ve spent more than your fair share of time talking to real estate agents. The last thing you want to do is start talking to bank managers. So …
Step 2
Second, find a good mortgage broker to do most of the legwork in finding the best deal for you – which will be dependent on your financial position, and the place you’re buying.
Just like when you’re talking to your husband, it pays to be crystal clear when talking to your broker: tell them you don’t care about all the bells and whistles the banks offer (honeymoon rates, repayment holidays, fixing part of your loan, having a redraw facility – this is where they hide the fat). All you want is the cheapest loan (after taking into account exit fees).
One way to do this is to ask for a ‘professional package’, which most banks offer. This will give you a discount on your interest rate, lower fees, a fee-free credit card (which you should cut up), and preferably an offset account.
Step 3
Third, remember that, for all the bankers’ bluster, everything’s up for negotiation – exit fees, entry fees, interest rates, and how you pay your broker – everything.
Most mortgage brokers get paid for their work by the lender you end up going with. They get paid when you sign up for the loan, and then every month you stay with the loan.
This tosses up two challenges:
Mortgage Broker Challenges
Challenge 1:
Most mortgage brokers will only work with banks that pay them kickbacks, and tend to exclude smaller lenders who don’t pay them this way but may be cheaper for you, and
Challenge 2:
These payments end up costing you a fortune over the life of your loan.
So let your broker know that you’re happy to pay a fee for their service – perhaps three or four thousand dollars – but they are to rebate all upfront and monthly kickbacks straight onto your loan.
Along with throwing everything but the kitchen sink at paying the damn thing off as quickly as you can, this strategy will save you tens of thousands of dollars and slash years off the time it takes you to test out whether the grass under your feet really does feel different!
Tread Your Own Path!
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9 comments
cool. that should well and truly make clear to everyone that you are not against mortgage brokers – quite the opposite – you are just against the dodgy way some of them get paid.
still, if you do find a better deal in two years and wanna switch, you’d be better off going with the “kick backs”
on the one hand, the kickbacks, and the influence it has over broker’s willingness to work with the bank, being so secretive is dodgy. on the other hand, paying no upfront fee and paying a fee based on how long you stay with the loan might be a good thing, in a perfect world where you could switch to a better deal with ease, clearly the longer you stayed with the loan, the better deal it turned out to be, and hence the higher fee you pay your broker finding it for you. that seems fair to me.
in this current debate about exit fees: paying your broker up front is equivalent to having more exit fees (or entry fees… same dif). you sacrifice flexibility in being able to switch loans. really you just have to trust they will give you a good long term deal.
‘everything is up for negotiation’…really? We have been trying to negotiate EVERYTHING with commonwealth bank – all to no avail. They can’t match our online savings rate with other banks, they can’t reduce our variable or fixed interest rate on our mortgages, and they won’t reduce our exit fees. Seems like we have chased it all, but there is no negotiation!!! We ask – they say no!! So where does that leave us?
Negotiation works best before they have your money or you have signed up for 30 years. After…whats in it for them. If they reduced your mortgage it doesnt mean you still wont walk because of a better deal elsewhere but they have lost money. Member banks are business’
commonwealth did that to me too, got them to give me a great interest rate for an online only account, over 6%! Yeah! but the catch was I had to open an alongside account that charged $4 – to $6 per month in fees, an unavoidable account apparently, for my measly $5000.00, which took me 5 years to save up, the forced account keeping fees meant I was no better off than if I kept my money in the existing low interest account I had with them – you guessed it, I now saving my savings with one of the internet banking accounts reccomended by the barefoot! Then commonwealth put up their interest rates more than the reserve bank a couple of days later, and I just put an offer in on a property, – guess what, they won’t get that business either! (why did they think I was saving money up for – just to let them play with it???!!!!)
walking out the door. I’d say.
especially with savings!
it is FREE and EASY to just move to someone decent, like UBank.
there is no rule that says you have to use one bank for everything.
(also I’d go offset account over online savings any day if I had a mortgage, but whatever.)
I get weird looks off all my friends because I say I own a mortgage which entitles me to stay in my future home. They just dont seem to grasp the fact that until that last payment you dont own the place, the bank does.
I used a broker and am on a package where my mortgage is 0.7% below the standard. I also fixed 60% of it for 3 yrs when the bank rate was at 5.4% because I knew interest rates where going to go up and by fixing that amount it meant I had certainty over the majority and could pay off the 40% faster. End result, I am paying off the variable section as if the interest rate was at 12% so the rises have zero impact on my budget.
But I think the main thing for home buyers to do is be sensible about your first home. It is called your FIRST home for a reason and just like your first car it should be bought with the knowledge that you will probably upgrade/change it and normally before the 10 year mark based on Australian averages.
If you are a single or a young couple starting out, you dont need a 3+ bdr, 2+ bathroom, twin garage place. In fact you will be better off financially if you buy a smaller place. You mortgage payments will be less and if you invest the difference back in the place, ie pay off more than you need to, when it comes time to upgrade/move you will have equity and wont need as big a mortgage on the larger place (and hopefully you will have a better paying job by then too)
So save yourself a lot of stress (financial and emotional) and shop for a place that will suit for the now.
I am not completely convinced by this approach Jane. I can’t tell you how sick to death I am of hearing people talk about “getting into the property market” or about a house being “perfect for first home buyers”. If you ask me, the cost of buying a house makes it impractical to buy one house, only to sell and buy another one each time you want an upgrade. When you buy you might have to pay $20k in stamp duty and other fees. When you sell it might cost you $15k in commissions and other fees. For me, it is not a great idea to keep buying and selling unless you are an investor. When we are talking about the family home, follow Scott’s advice and make sure you do all the right things beforehand like having a big enough deposit and being able to cope with interest rate rises. Better to save and buy once later on, than buy and sell and buy and sell and buy until you have the house you want. There is no prerequisite that says you have to buy a smaller home before you can buy a bigger one, so the idea of “getting into the property market” so you can get a foot in the door is ridculous. Also, equity is a farce. Remember those old TV shows where the family goes broke and had to mortgage the house. That’s exactly what borrowing against equity is. Just a change in terminology from the bank to make it more attractive. Kind of like the government referring to climate change instead of the greenhouse effect. Same thing just more newspaper friendly.
Hi Scott,
on you’re show you’ve mentioned mates rates mortgage brokers – is there much of a difference by going with them rather than sourcing your own broker and paying an up front fee (rather than them collect kickbacks)?
the only benefit I can think off is that the individual broker might be able to work with other banks (that mates rates do not) but you have to pay the upfront fee for their service – where with mates rates from what i can gather you dont?
Scott, in practice are there many lenders who allow and facilitate a rebate of broker commission directly onto the loan? (i.e. in the same way that can be done with managed funds.) If one expects the broker to manually rebate monthly trail commission then it may be unrealistic as the benefit may outweigh the administrative burden. I think it may be time for the lenders to offer the same commission functionality as investment products.