An Easy Way to Save Time and Money Off Your Mortgage
With recent cuts to the interest rate by the Reserve Bank it’s worth thinking about how you could use the cuts to get ahead of your mortgage debt and save yourself some time and money over the course of your loan.
Australians could shave $40,000 and three years off their home loan if they keep up their current mortgage repayments despite the latest interest rate cuts, according to new analysis.
Comparison website Finder found that most variable rate mortgage holders were set to save more than $100 a month as a result of the two rate cuts.
According to Finder, the average Australian mortgage is $384,700 and at the average variable rate of 4.91 per cent borrowers’ monthly repayments would be $2044, or $735,856 over 30 years.
But if borrowers forgo that $100 monthly saving, they would save $40,213 in interest over the life of their loan and reduce their loan term by three years.
Finder insights manager Graham Cooke urged borrowers to use the rate drop to get ahead on their mortgage debt.
“As borrowers are accustomed to that higher repayment amount, it won’t cause them any extra pain for a lot of long-term gain,” Mr Cooke said.
If you paid an extra $100 a month, you would save $40,213 in interest and you would reduce your loan term by three years, according to Finder.
Any extra repayment home owners make above the minimum amount set by their lender would go towards the principal of the loan unless requested otherwise.
More than six million Australians had home loan debt, Mr Cooke said, so savvy owners who committed to additional repayments now would reduce the chances of mortgage stress when rates do increase.
Domain analyst Eliza Owen said plenty of Australians were already exceeding minimum repayments.
“RBA research from 2017 suggests about one-third of owner-occupiers were at least two years ahead of their scheduled repayments,” Ms Owen said. “The faster you pay down your principal debt, the less you would generally have to pay in interest on outstanding money”.
“While this analysis may be based on an average variable lending rate reported across large banks, Domain data suggests the actual average rate on new mortgages is much lower.”
“For principal-and-interest owner-occupier loans, the average rate of new mortgages is currently about 3.6 per cent. This means the cost of borrowing is even lower, and could enable even more Australians to get ahead of their loan repayments if they maintain their repayments.”
EY chief economist Jo Masters said the rate cuts needed to be assessed through the context of headwinds faced by Australian households, including low wages growth and high debt levels.
“Some households are struggling to meet their cost of living, which would very much welcome a reduction in repayments,” Ms Masters said.
“There is no right and wrong. It’s balancing the benefit of repayments versus the stress of your cost of living versus your income.”
On a broader level, a reduction in minimum repayments would be welcomed by the government and the RBA alike to stimulate a slowing economy, Ms Masters said.
“The reality is … some [households] will save and some will spend.”
Article by: TAWAR RAZAGHI, TWITTER JOURNALIST, JUL 16, 2019
