Are mortgages set up to rob $100,000’s of your cash?
The nation’s largest lender, the Commonwealth Bank, earns more than $1.2 million in cash profit every hour, every day. Yep. 24/7 365. It would seem the wealth isn’t so much ‘common’ as it is the Bank’s.
Banks make money by lending it at a greater rate than what they borrow it for. It’s an easy enough system to understand. Generally, the profits of banks in Australia are made by lending money to people who want to purchase a home or investment property.
The system has been set up to work for the bank. Not for you.
For a start, you should know the workings of a home loan, but your bank or your mortgage broker most likely haven’t educated you on this. It’s not their fault necessarily, because really, you only asked them if you can afford the dream pad and wanted to know how much it would cost you each month!
You’ve been conditioned to believe that you MUST have a loan for 25 or 30 years and that the real important number is the interest rate. Wrong and wrong. You MUST NOT have a loan for anywhere near that long, and the interest rate is not necessarily the most important number.
The interest rate is a little red herring. Part of a complex magic marketing trick the banks have been playing on you for years.
What’s the important number then? Total interest paid.
The bank calculates the minimum you must pay at each regular payment as determined by duration to maturity (when the loan must be fully repaid). Because the principle is at its highest in the first ten or so years of the loan, the majority of the repayment (kindly calculated for you by the bank) is going towards—you guessed it—paying interest (their profit).
This means the principle stays fairly high for the first 15 years or so. Finally, more of your repayments are going towards the principle and it begins to decline
Less principle, less interest calculated. Simple, right?
The difference in total interest paid between a 15 and 30-year loan is staggering. For a $600,000 loan—say, at 4%—the difference in interest could be more than $150,000. That’s 25% of the value of the loan!
The banks manage to keep you in the bad debt cycle by employing all sorts of clever sales tricks.
They throw credit cards at you, offer you massive limit increases, car and personal loans, and the offer which really gets people; the refinance. While this ‘refi’ is not necessary a bad thing in itself, it does reset the interest time-bomb.
Where you get trapped is when the refinance comes with an increase in debt to renovate the kitchen, a pool, holiday, pay school fees, whatever. Here’s the problem: you’re spending more than you earn, living off your equity, and are being trapped by the banks in a nasty cycle that will in most cases see the bank owning your home for the remainder of your existence.
You do get to live there, but the chances are you’ll never actually own it.
But enough with the doom and gloom.
So how to beat the banks? Here’s some advice that sounds easy to follow, but isn’t. It isn’t, because financial discipline is hard work. If you can’t discipline yourself, you can make it more difficult for yourself to spend by putting some steps in place that will have you thinking twice about your next ‘it was 30% off so I grabbed it’ purchase.
For a start, consider the following ideas:
Have everything you earn paid into a redraw account – one with no fees. Then budget to spend a few hundred less than what your minimum repayment is–every week. What we like about redraw facilities is that in an emergency (your mates wedding in Thailand is not an emergency) you can access your cash.
Amazing how suddenly that party frock or gigantic plasma you coveted isn’t worth your hard-earned after all. Financial discipline and spending awareness, people.
Remember, paying more than the minimum amount into the loan is where you pay off more of the principle, which means you’re in debt for less time and pay much less interest to the bank.
Clover Partners exists to help you get pay off you mortgage sooner with simple, proven advice and a unique solution that will have you financially secure, fast. We know how the system works and we can show you how to work the system. If all this sounds pretty good, but you don’t have the time to make it happen for yourself, then we’d be happy to help at no cost, so get in touch.
Want more insight? Give us a call on 1300 823 995 or touch base below