Despite another month of RBA rate inertia, banks are slashing fixed rates in their attempts to maximise market share. Meanwhile, I’ve been on the lookout for the mortgage of my dreams with a handsome 100% offset.
According to Wikipedia, ‘an offset mortgage…reduce[s] the interest charged by offsetting a credit balance against a mortgage debt, with interest charged based on the outstanding net debt.’ Offset also minimises taxable interest accrued from savings account(s).
When I hooked up with my first mortgage, I didn’t even consider offset. Mitchell Watson from Canstar Cannex says that ‘Redraw facilities are targeted towards savers who don’t want to be tempted to dip into their money on a regular basis’ (via The Age) and that was me. A $50 fee seemed like an excellent slap on the wrist should I ever dip into my redraw funds. Offset, on the other hand, required fiscal discipline I lacked.
Over the last couple of years, however, I’ve changed from thriftiness out of desperation to thriftiness out of habit and I think I’m now mature enough to handle an offset account. So how was I going to divorce No. 1 and move onto No. 2?
I went through my mortgage matchmaker (aka broker). Admittedly, what I should have done was shop around and then talk to my broker as per Del Vecchio of HSBC (via The Age), but unlike some of my friends, I am a non-aggressive bargain hunter. I had a vague idea of what was a reasonable variable rate and the kind of products that were available. I gave my broker my priorities (competitive lower rates, offset capacities, split loan capacities) and she offered me a couple of products from her portfolio. I applied for the one that ticked my boxes.
When my home loan was approved, and I had all of the terms and conditions in front of me, I calculated my switching costs:
$700 – Deferred establishment fee from Mortgage No. 1
$350 – Settlement fee from Mortgage No. 1
$162.40 – Lawyer’s fees from Mortgage No. 2
$204.80 – Land Titles Office fee from Mortgage No. 2
These figures went into MoneySmart‘s** Mortgage switching calculator, which gave me an idea of how long it would take for me to recover the switching costs (15 months), and my theoretical savings over the course of the loan (around $30,000)***.
Once I signed the papers, it took nearly a month for the refinancing to go through. With so many people refinancing, it’s taking the banks around 10-15 days to process a request. Not that I minded. While I waited for the paperwork to go through, my fixed rate dropped another 0.1%.
The loan discounting may continue or it may plateau like Eric Johnston predicts. Whatever happens, I’ve made my choice and I’ll have to stick it out with this new mortgage for richer or poorer, for two years or more.
20 years and 8 months to go,
*The moral of the story is that flexibility is an important feature of your loan. Don’t overlook it.
**MoneySmart is a government website that talks abouts money. It is ftw.
***This is actually an underestimate, since it does not factor in savings from offset arrangements.