3 ways to cut loan costs if you’re stuck in mortgage prison

How can you cut loan costs if you're stuck with your mortgage?

Well, many mortgage holders have recently switched lenders to cut their loan costs.

The Australian Bureau of Statistics reports that a record $12.8 billion in owner-occupied loans were refinanced to a new lender in August alone.

However, according to Effie Zahos, money expert and Editor-at-Large at Canstar, "not everyone wanting to cut their loan cost is able to refinance their loan."

She commented further:

"An escape from rising interest rates is to refinance to a lower-rate loan and cut monthly repayments along with interest paid over the life of the loan.

If the price of your property has fallen and pushed your loan-to-valuation ratio above the 80% mark, you could find that when you go to refinance to secure a lower rate you won’t be able to without having to pay costly Lenders' Mortgage Insurance.

This is an expense that no borrower wants to incur at the best of times, let alone when living costs are steep and interest rates are still rising.

More households could find themselves in mortgage prison with CoreLogic data released this week showing national property prices have fallen for the sixth month in a row as higher interest rates make borrowing more expensive.

The Reserve Bank is predicting national property prices could fall by 20 per cent over the next two years."

Here are ways how you can cut your loan costs:

 1. Downsize your loan

According to Effie, this is the easiest option is to downsize your loan by calling your lender and asking to speak to their mortgage variation specialist to see if there is a more suitable, cheaper alternative loan they can offer you, which is usually a basic variable rate loan.

This could cut your loan repayments and provide you with some rate relief without having to refinance to a new lender.

For example, switching from the average package variable rate to a basic variable rate for a $500,000 loan over 30 years could cut the interest rate by 0.14% and repayments by $43 per month while the total interest over the life of the loan could be shaved by about $15,334.

For those on a package variable rate with one of the big four banks then making the switch from the average big four bank package variable rate to their average basic variable rate could cut monthly repayments on the same loan size mentioned above by approximately $425 and potentially wipe more than $152,000 in interest over the 30-year loan term.

2. Refinancing may still be an option

If your property value has taken a dip and your loan-to-value ratio (LVR) is higher than 80%, it may still be possible to refinance to a lower-cost loan, says Effie.

She further explained:

"If your property value has taken a dip and your loan-to-value ratio (LVR) is higher than 80%, it may still be possible to refinance

to a lower-cost loan but your loan options will be limited to higher LVR offers and you will likely be charged Lenders Mortgage Insurance (LMI).

This can be a barrier to switching and keeps borrowers in mortgage prison, however, LMI can be added to your loan meaning you don’t have to pay it upfront and the potential savings from switching could make up for it.

Making the switch from the average big four bank package variable rate to a lower rate that is available at a higher LVR of 85% where you can add the LMI cost to your loan could see savings.

Using a $500,000 loan over 30 years as an example, refinancing to the lowest variable rate available for an 85% LVR would cut the rate by 1.96% and after adding LMI to the loan amount it could cut the monthly repayments by roughly $571 and reduce the interest paid over the life of the loan by around $211,128.

The potential savings will vary depending on the new rate secured and the LMI premium that applies."

3. Look for Lenders' Mortgage Insurance (LMI) discounts

You can also look for Lenders' Mortgage Insurance discounts.

Though not mainstream, there are some lenders that waive Lenders Mortgage Insurance for certain professions.

Effie further explained:

"If your LVR is higher than 80% and the thought of paying LMI is preventing you from refinancing, you might keep your eye out for LMI discounts.

Discounted LMI loans are available for first-home buyers but many people may not know there are also low or no-LMI loan options for those looking to refinance. Some lenders limit these to borrowers with certain professions.

Refinancing a $500,000 loan over 30 years from the average big four bank package variable rate to the lowest rate available with a no-LMI special offer for 85% LVR loans available from Ubank, could cut repayments by around $240 per month, reduce interest over the life of the loan by approximately $86,123 and save having to fork out an estimated $5,544 for LMI."

The bottom line

There are indeed ways in cutting loan costs, however, keep in mind that property valuation results can also differ from bank to bank.

It is worth doing your research, checking on a comparison site and chatting with a broker to compare notes.

Finally, before deciding whether or not to choose a particular loan it is important to assess whether it is appropriate for you in light of your personal circumstances, objectives, financial situation and needs.

About Brett Warren Brett Warren is National Director of Metropole Properties and uses his two decades of property investment experience to advise clients how to grow, protect and pass on their wealth through strategic property advice.