Haven – Winter 2023

Parachuting

off the mortgage cliff

With more than 800,000 Australians about to come off low, fixed-rate loans, one couple share their story of navigating a soft landing from what looked like the brink of disaster.

Before Christmas, Kylie and her husband Mitchell were at a financial tipping point. They were about to fall off a mortgage cliff that would catapult their monthly home loan repayments up by $1800 a month to nearly $5000.

They simply couldn’t pay. “I didn’t know how we were going to make ends meet. Our whole lives were about to change,” Kylie says of the enormous stress the couple were under as they neared the end of a low-rate fixed-term mortgage. “We thought we’d have to take our kids out of private school, away from all their friends.”

Back in March 2021, the couple had locked their $670,000 home loan in at 1.97 per cent, and as the two-year expiry date loomed it looked set to revert to more than three times that rate.

To Kylie, it seemed bewildering that they had ended up in this position. They’d always been so sensible, she thought. Through their 20s, they lived with parents to scrape together enough to build a house on a block of land they bought outright with their savings.

In 2015, a year after they had their first child, they used significant equity in that home to buy a modest investment property. When they had their second child, they did it again.

“The idea was to have these investment properties for our children. That was going to be a gift to them later in life. Their inheritance,” Kylie says.

They thought they were following sound advice to build equity and invest.

“Our old bank had said the best way to purchase the properties was to pull equity out of our home which meant that our mortgage increased pretty significantly, which I wasn’t really prepared for. I just couldn’t get my head around that our mortgage had essentially doubled from $320,000 to $670,000.

“I would call and say have we got this set-up right? And they would say ‘yes’.”

Stable, low interest rates meant that despite their misgivings, they were still in a comfortable position and in 2021, Kylie fixed their home loan as rates dipped to record lows.

“We weren’t in any financial stress, it just seemed a good opportunity to save some money. When rates started to creep up, we thought, ‘oh, lucky’.”

That shifted to ‘oh, dear!’ when rates continued to climb sharply.

“These rises weren’t something we had ever witnessed. In the time that we’ve been homeowners, interest rates had always been stable,” she says.

Now they were moving at record pace, pushing thousands into mortgage stress. Kylie and Mitchell thought they would need to pull their children out of private school or sell an investment property to meet repayments when their fixed term ended. Both options felt like selling their children’s futures.

But in late November, a chance encounter saw the couple referred to a mortgage broker, and within months she had overhauled their finances and pulled them back from the edge of a financial cliff.

“It’s been literally life-changing,” Kylie says.

Their broker explained the couple could drastically reduce their monthly outgoings and give themselves financial breathing space by moving most of their debt from their home loan to their investment loans and switching these from principal-and-interest to interest-only to ride out the higher rates cycle. This also gives them the ability to concentrate on paying down their owner-occupied debt.

“We had things back-to-front,” Kylie says of their previous loan arrangements. “I felt so stupid, but I also felt really let down by our previous lender. It taught us a lot about not just going into things blindly. Our poor broker – I asked her a lot of questions because I needed to understand everything this time.”

The couple’s new loan contracts changed hands in late February, a week before their large home loan was about to revert to a crushingly high rate.

Under their previous structure, the couple had a $670,000 home loan and two $200,000 investment loans, paying principal and interest on all. Under the new arrangement, they dropped their home loan to $370,000 and used significant equity in the investment properties to bump the loans to $350,000 each, and flipped them to interest only.

While this means they are not paying down debt on the investment properties at present, it has allowed them to hold on to both units, with rental income covering interest payments.

And with their home loan almost halved, the couple’s monthly repayments have actually dropped from $3000 to $2400, despite moving from a fixed rate of 1.97 per cent to a variable rate of 4.94 per cent. It’s delivered them room to manoeuvre while inflation and rates are high.

And the kicker? The new loan deal came with a cashback offer of $5000.

“Never in our wildest dreams did we think we were going to walk out saving money. We thought maybe our broker could just make the hit a little bit easier to take. But it’s just changed our whole financial position completely,” Kylie says.

While talking about personal finances used to be a bit of a taboo topic, Kylie wants to share her story in the hope it will prompt others to act early to avoid high revert rates.

“We’re in an environment now where it’s just a normal conversation to talk about your finances because people are hurting.”

Are you worried about rising interest rates or the end of a fixed term? Don’t put it off. Call me to book an appointment to review your finance. You might be surprised what options are out there.

Case study

Borrowers: Kylie and Mitchell, both 38. He is a plumber and she works part-time in the insurance industry. They have two children aged seven and nine.

Loans: The couple have mortgages on their family home and two investment properties.

The problem:

A two-year, fixed-rate mortgage on the family home was due to expire in March 2023, reverting from 1.97 per cent to around 6 per cent and sending monthly repayments on the $670,000 loan from close to $3000 to nearly $5000. The couple’s two investment properties were positively geared, with rent covering principal and interest repayments on two $200,000 loans.

The solution: Their broker was able to create financial breathing space by refinancing and restructuring the loans to shift debt from the family home to the investment properties and flipping these to interest only, slashing their monthly outgoings.

The result: Residential mortgage repayments fell to $2400 a month by cutting the loan to $370,000. The two investment loans were bumped up to $350,000 each, but flipped from principal-and-interest to interest-only, meaning rent would still cover repayments.

Bonus:

The couple secured a $5000 cashback on refinancing, while also consolidating creditcard debt. They saved on fees (and confusion) by reducing multiple offset accounts to one.

“It’s been literally life-changing”

Apart from being fun to say, tongue twisters improve pronunciation, build reading skills, strengthen speech muscles and can help you warm up for public speaking. According to the Guinness World Records, the most difficult tongue twister in the English language is:

The sixth sick sheikh’s sixth sheep’s sick. Go on – off you go, try it!

Throwing shade

Why on earth are there so many different white paints?

Keep it simple, they said. Go with a fresh white, they said.

Well, they failed to mention there are literally thousands of shades of white –from alabaster to almond milk, thin ice and even house white (and no, a glass of this won’t help you decide – apparently, it’s not for human consumption.)

Nearly everyone who has attempted a budget home makeover has been in this position – staring at a mindboggling array of paint shades, desperately wishing for less choice.

Don’t panic. You are on the right track. Paint is the perfect place to start if you want to give your home a facelift on a budget. Nothing transforms a space more quickly and easily than a fresh coat of paint.

And white is, by far, the most popular interior and exterior colour because it reflects natural light and creates a feeling of greater space. It’s less likely to date than other colours and is no longer considered boring thanks to white-onwhite coastal chic trends. But getting the shade just right can be surprisingly tricky. Go for the wrong undertones and crisp becomes clinical, while cosy can end up looking like a nicotine-stained bedsit.

Unfortunately, there’s no one-white-fits-all shade. But there are a few simple steps you can follow to nail your fresh white makeover.

Budding Picasso

Has one of your offspring brought home a painting from school that would blow our art-appreciating socks off? Have you produced a painter, drawer or sculptor whose works could rival collections in the Louvre? Show us your child’s arty talent for the chance to win $1,000.

How: send a photo of your child’s (or grandchild’s) art: a painting, drawing, sculpture etc. Let us know the artist’s name, and any backstory we might enjoy about their art.

Send to: havencompetitions@afgonline.com.au

Include: your name, address, email, phone number and the name of your mortgage broker.

Dates: opens on May 12 and closes on July 10.

Winner: will be decided on July 11 and notified by telephone after this time.

Terms and conditions: visit http://bit.ly/HavenWin

Warm or cool?

Whites can broadly be divided into shades that carry either warm or cool undertones.

Warms throw subtle red, yellow or orange undertones, while cool whites reflect blue, grey or green tones.

Pro tip: If you’re having trouble telling your warms from your cools, stop comparing them to each other. Instead, take a piece of plain printer paper with you and lay each colour swatch on that. You should immediately see the undertones reveal themselves.

Deciding whether to go warm or cool will hinge on a few key factors:

Architecture: Generally, cool whites tend to suit more open-plan, modern spaces, lending a crisp, minimalist feel to areas with clean lines and plenty of natural light. By contrast, warm whites usually create a cosy feel in older homes with more traditional architectural details.

Décor: If you have flooring and soft furnishings that are going to stay, you need to match the white paint to the undertones already present.

Trends: Cool whites and ‘greiges’ were huge pre-pandemic, but more recently warm whites with earthy undertones have made a comeback and sit comfortably alongside the trend colours of 2023 which include clays, dusky pinks and greens.

Light: Cool whites look crisp and fresh in rooms bathed in natural light, but can appear quite dark and throw a depressing blue cast in rooms with lower

light. Warm whites will do the opposite and soften rooms that don’t get much natural light, but they can look too yellow in sundrenched spaces.

If you’re still undecided on tone, get one warm and one cool sample swatch (don’t worry too much about the exact shades just yet) and put them on the wall you want to paint. This should make the initial choice clearer. The major paint companies now sell large peel-and-stick colour swatches online.

Deck the walls

Once you’ve chosen a side in warm versus cool, it’s just a matter of narrowing down your shade to three or four possibles. Grab some sample pots and paint test patches on the walls. Go big – at least 60cm x 60cm – and keep the colours close to each other to avoid the existing wall colour from skewing your perception. You’ll need two coats, particularly with white tones, to get a true reflection of the colour.

Then just sit with it for a while. Look at the test patches at different times of the day and ask anyone who passes through for their opinion.

Take

it to the roof

When you’ve settled on a colour, be prepared to take it not just up the walls, but on to the ceiling. It’s a controversial tip, but when painting interiors with a white shade, many top designers, including makeover queens Three Birds Renovations, swear by tinting all paints – including trim and ceiling paint – the same colour as the walls to make rooms appear larger and more cohesive.

Lightbulb moment

A final word. Consider how your lighting choices, or existing lights, will work with your chosen shade of white. Modern LEDs, like paints, come in warm, cool and neutral hues. Cool lights on warm white walls are generally a no-no, because it throws blue tones. However, the reverse – warm lights on cool walls – can work. Cool on cool is great in spaces such as kitchens and offices, but be careful to balance it with warm elements, such as timber or earth-toned soft furnishings in other areas of the house.

Roll with it

One of the most basic of the Pilates moves, the standing roll-down is used to relax and free up the body before commencing a session. Used on its own, it’s also an excellent stress reliever and a great way to ease a tight back. Don’t let the simplicity of the roll-down fool you. It stimulates abdominal support while opening up any tension held in your back and neck. It only takes a few minutes and can be done anywhere. Any time your back is aching or you’re feeling tense, kick off your shoes and try this. Make sure you take it slowly – the slower and more controlled the movement, the better the result.

+ Stand with your feet parallel and hip width apart, arms relaxed by your sides.

+ Inhale, pull your abdominals in.

+ As you exhale, roll your chin towards your throat and gently bring your nose down towards your chest –lengthening the back of your neck.

+ Start rolling your spine downwards one vertebra at a time. Imagine your head is a weight and let it take your body down with it.

+ Hang rag doll-like over your legs, keeping your abs pulled in. Keep your neck and shoulders relaxed and let your head and arms hang freely.

+ Stay in this hanging position and take several long, deep breaths in and out.

+ Exhale and very slowly begin to roll back up, rolling upwards one vertebra at a time.

+ Repeat the roll-down at least three times and feel the tension melt away.

Congratulations to Julia who has won $1,000 with her swoon-worthy story of love. A chance encounter at the most ordinary of places set in motion an enduring love story. Ain’t love grand.

“In February 2003 I met the love of my life in a remarkable encounter.

A routine task changed our lives forever when we were both at the same checkout aisle at the supermarket. Our eyes met, we smiled and then shyly turned away; one with Weet-Bix in hand, the other with tea leaves.

The connection and attraction was instant. We completed our purchases and walked back out into the shopping centre and on with our days, when 10 minutes later we saw each other again. We looked at each other and just stopped and introduced ourselves with a handshake. We had a brief chat and walked away – both too shy to take any further steps. I returned to work with butterflies in my stomach and the strongest sense that I would meet this man again.

That evening I was catching up with an old friend and I told her my story. She said she knew who Trav was, and we plotted a plan whereby she would organise Friday night drinks for the three of us, but she herself would not come. The plan worked and three days later we met for drinks and never looked back. That was 20 years ago.

Who knows where our paths would have journeyed if it wasn’t for low supplies of essential items. We are all grown up now, Trav makes me a pot of tea every morning and we are still eating Weet-Bix each day

Show me the money fine print

Mortgage refinancing has hit record highs as borrowers chase better deals in the face of rapid interest rate hikes. And lenders keen to snap up these swinging homeowners are dangling more and more cashback carrots.

In March, there were more than 30 loans on the market advertising cashbacks around $2000-$5000, most for refinancers rather than new borrowers.

While the lure of cold hard cash is undeniable, any offer involving free money quite rightly gets people’s Spidey senses tingling. What’s the catch?

Well, when it comes to cashbacks, the catch can often be that higher rates and loan fees may erode short-term gains over time. So, if you’re a set-and-forget borrower, you may end up worse off in the long run. On top of this, each loan has different terms and conditions that can limit repayments, or require additional bank accounts and credit cards that add costs.

However, in the right circumstances, a cashback can work. There’s a lot to consider, so let’s step through a few basics, starting with why a mortgage broker is a good jumping-off point to see how cashbacks stack up against other refinancing options.

Your advantage is our legal duty

Most lenders are bound by Responsible Lending Obligations (RLO). That means they need to make sure consumers can repay a loan.

But from the start of 2021, mortgage brokers have also been held to a higher standard, known as Best Interest Obligations (BIO). Under combined RLO and BIO, mortgage brokers need to not only check clients can afford a loan, but that it is also in their best interests. In short, it’s our legal duty to recommend the product that will work best for you.

That’s a reassuring industry guarantee when you’re navigating a range of products that, on the face of it, can seem quite similar, but come with complex conditions.

So, call to arrange a meeting to discuss all your options, but first, it’s worth explaining a few basics about cashbacks.

Why offer cash?

Historically, the aim was to cover out-of-pocket costs that frequently prevented borrowers from switching lenders, such as application and break fees. But as this process has become easier, and refinancing rates have skyrocketed, they’ve become more of an enticement.

To get an idea of how many homeowners are loan shopping, refinancing rates are running around 25 per cent higher than the same time last year, according to the Australian Bureau of Statistics, and hit an all-time high in November.

What to weigh up

Even Reserve Bank Governor Philip Lowe thinks homeowners should be looking at refinancing, telling Parliament’s economics committee in February: “There are some good deals out there and people should hunt them down and take them.”

If you’re hunting a cashback, there are few things to keep in mind:

• Comparison rate: You’re not alone if you’re not exactly sure what a comparison rate is. Essentially, it’s the long-term cost of a loan, including fees and charges. It’s calculated based on a $150,000 loan over a 25-year term and is seen as a better reflection of actual costs. Lenders are required to list a comparison rate alongside their advertised rate to allow borrowers to compare apples with apples. Of course, your individual circumstances will impact these calculations.

• Beware prison terms: Don’t base any cashback decision on pocketing some quick cash and refinancing in 12 months. A lot can change in a year, so don’t expect to automatically qualify for the same loan amount. Rising inflation and interest rates, along with falling house prices can impact both your borrowing capacity and equity. Be wary of getting locked into a loan that won’t work in the longer term if you can’t refinance. The Australian Financial Review1 estimated that in the year to March 2023, the amount most people could borrow from major banks had dropped by around 30 per cent.

• The fine print: It almost goes without saying, but your mortgage broker will step you through any less obvious fees that can impact the cost of the loan.

• Stress test a three-year outlook: Brokers are seeing a relatively new phenomenon: customers looking to refinance each year, often chasing cashbacks. While it’s good to review your loan regularly, jumping from one package to another for the wrong reasons can impact your credit score. Aim to compare loan costs based on a minimum three-year horizon.

• You don’t ask, you don’t get: Before you switch, get your broker to ask your current lender for a better rate. The market is so competitive at present, it may save you the time and money of applying for a new loan, so it’s almost as good as securing a cashback.

1 Sweeney, N, Rate rises slash borrowing capacity by 30pc, The Australian Financial Review, 10 March, 2023. www.afr.com/property/residential/rate-rises-slash-borrowing-capacity-by30pc-20230310-p5cr3e