If your lender passed on either of the two recent cash rate cuts, you might be excited about how much less you’ll be paying each month on your mortgage.
Before you start planning other ways to spend this new-found coin, consider this.
Borrowers who commit to keeping their repayments at the same level could save thousands, and years of making payments.
New Finder analysis shows that homeowners with an average variable mortgage who keep paying the same repayments, despite reduced rates, could shave $40,000 and three years off their loan.
Let’s say you have a mortgage of around $400,000 and you were paying 4.91% – the average variable rate as of June 3, before the first cut.
If your lender reduced your rate to 4.41% (i.e. they gave you both 25 basis point cuts in full) your monthly repayments would go from $2125 to $2005 per month.
Great news, right?
It is, but – if you paid that extra $120 a month toward your loan, you’d save $40,300 in interest and cut 39 months (three years and three months) off your loan term.
If you are accustomed to that higher repayment amount, it won’t cause any extra pain for a lot of long-term gain.
No one expects the rates to stay this low forever, so it’s a great idea to make hay while the sun shines, as my dad always said.
If you can make additional repayments now, you’ll reduce the chances of mortgage stress if (read when) rates eventually do go back up.
Any extra repayments you make above the minimum set by your lender go toward the principal of the loan.
Mortgage debt is a major responsibility and there’s never been a better opportunity to get on top of it.
If you truly want to feel the effect of these payments, make this a habit and not just a one-off contribution.
Now is also the perfect time to ‘ditch and switch’ your home loan provider.
Shop around to find a variable home loan that offers a lower interest rate than your current provider. The very lowest rates now have a ‘2’ in front of them.
By deliberately putting those savings back into the mortgage you could make a significant difference to the amount of interest you pay over the life of the loan.