Why those cheap Home Loan rates won’t save you money

It used to be the case that finding information about how to get ahead financially was difficult, but now it seems we are bombarded with information and opinions at every turn. The media, friends and mortgage brokers are constantly putting content and ideas out there, and not all of them are in our short or long term interest.

Let’s take the interest rate you pay on your home loan as an example. Whilst it’s true that you don’t want to pay the bank more than you have to, by consistently chasing rate, changing strategy based on a media release, advertisement or what your friend recommended on Facebook you are playing into the banks hands. If you want to turn the table on the banks, then you have come to the right place.

What we are going to share with you are the three things you need to know to really get ahead with your home loan.

Step1 – Understand what the “Real” Interest rate is.

The real interest rate is not the one you see on your statements, or the one that the bank enticed you with when you signed up with them. It is what is commonly referred to as the “Comparison Rate”. The home loan rate or interest rate is what you pay each and every month, but the comparison rate is what you will pay over the life of your loan when all relevant interest, fees and charges are factored in.

Consider the image below. This was taken several weeks ago, and whilst rates have increased since then, you can see that if you went for the cheap offer of 4.19%, what you were really locking yourself into is the 4.79%. That’s an extra $3,000 per year in interest, fees and charges on a $500,000 home loan.

The difference between the Advertised Interest Rate and the Comparison Rate could cost you thousands of $ each year

Some of you might say that you will be able to shop it around every year or two, so that you maintain the cheap rate, but human behaviour does not change.  Based on my personal experience, most of us will stick with our selected lender for at least seven years, so that tallies up to over $20,000 in additional interest, fees and charges that you do not have to be paying. By focusing on the interest rate alone, you leave yourself vulnerable to a low ball teaser rate that increases over time as a result of fees, charges and interest rate hikes. So the first way to beat the bank is ensure that the gap between the advertised interest rate and the comparison rate is as low as possible with your loan.  

Step 2 – Separate your savings from the account that you day to day

The banking infrastructure in Australia makes it very easy to spend money. Credit cards, pay wave technology, smart phones, iTunes and offset accounts are all created to make consumption easier – which translates to you spending more of your money. Right now you are thinking, “but I thought my offset account will help me pay off my mortgage quicker?”.

That’s what they are designed to do, but in our experience, very few Australians get the advertised value from an offset account as they use the offset account for spending and saving. Yes that is an oxymoron. That is why it is so imperative that you have the right banking system, so that you pay yourself before you pay big business.

For those of you asking what is an offset account, here is a brief definition.

An offset account is a bank account, just like your normal everyday transaction account and goes hand in hand with a home loan. Instead of receiving interest on any monies in the account, the interest payment due on the loan is calculated only on the net balance of the loan less the savings account. In short, one offsets the other – hence the name offset account. Make sense?

Imagine that you had a home loan of $500,000 and cash in your offset account of $50,000. The way an offset account works is that you would pay interest on the difference between the two, which in this case is $450,000. You don’t earn any money on the cash in your offset account, but assuming the rates in the image above, you would receive an after tax rate of 4.19%pa for money in your offset account. Which is pretty handy in the current market. Where most Australians get into trouble is that they use their offset account as the hub for their spending and saving, and before you know it, big business has found a way to encourage you to spend every dollar in your account.

Instead of having your savings and day to day money combined in the one offset account, a far better way is for us to set up goal-specific accounts using multiple offset accounts. You can usually create as many accounts as you like – one for holidays, renovations, school fees, etc. Not only will you get a much better deal for your money, and keep more of it, you can actually see the goals being achieved as a result of your funds in front of your eyes.

That’s why we created a system that combines that best of financial planning with the best cashflow and mortgage advice – we call it The Evalesco Effect. The Evalesco Effect is a system that is designed to allow you to meet your day to day expenses, whilst putting aside funds for those things that are important to you and essential to your mental and physical wellbeing. Our team have done all of the hard work for you, and all you need to do is turn the key.

Step 3 – Use a system that does not rely on you

The Evalesco Effect is a system we use with our financial planning clients to ensure that every pay cycle, monies are put aside for holidays, emergencies, savings and also investments and because it’s an automatic function, it sets you up to achieve your goals.  We use an online cash flow management system that uses live data feeds directly from your bank, so, not only can you see your expenses in real time (no more filling out budget planning forms!), you can keep check of all your offset accounts and where you’re up to with your saving goals. Data feeds, reporting and goal tracking all in one!

A cashflow plan is one part of the Evalesco Effect.

Then there’s that windfall. That’s the extra chunk of money that most people will blindly pay straight off the mortgage.

Stop!

Wouldn’t it be much better to allocate those monies to a range of purposes that are designed to meet your needs and priorities? Aren’t you better off putting some monies into the home mortgage, whilst topping up some of the accounts you have set up for emergencies, little Mia’s braces, your investment account and the future fund you have set up for the trip to New York in five years! It’s all about balance.

It is much better to create a plan that means you can still pay off your home loan within a desired period of time, but to also build in capabilities to reward yourself with some lifestyle goals along the way. A cashflow plan that uses multiple offset accounts, ensures that cash is available when you need it and doesn’t cost you anything until you actually use it.  It also reduces your interest every month.

In summary:

These super cheap home loan rates that are being promoted in the press, on radio and TV and on the internet, do not allow you to manage your cash smartly. They do not provide flexibility, and they will not allow you to pay off your home loan quicker. So, ditch the cheap home loan rate race, as The Evalesco Effect will leave you financially fitter, home loan happy and enjoying the finer things in life!

It’s my job to work as my client’s financial ‘lifesaver’ to ensure that they swim between the flags and that they don’t get in over their heads.