The mortgage belt ... interest rates will allow households a chance to get ahead on their home loans.
HOUSEHOLDS can make last week’s Reserve Bank’s interest rate cut work harder for them simply by doing nothing.
Variable home loan rates are set to drop by at least a quarter of a percentage point from February 20, and borrowers who keep their repayments at existing levels can save time and money.
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An analysis by comparison website Finder.com.au shows that for an average $300,000 mortgage at the average variable interest rate of 5.35 per cent, maintaining repayments at today’s higher level when the rate drops will save $20,707 over the life of a 30-year loan.
Rate cut could shave 22 months off a 30-year loan ... Finder.com.au money expert Michelle Hutchison.Source:Supplied
“Borrowers with a bigger mortgage who can afford to keep their repayments at the current level can potentially save even more because the interest on a bigger loan is much greater,” said Finder money expert Michelle Hutchison.
Borrowers will also cut 22 months off the life of their loan, regardless of its size, by following this strategy, the analysis found.
Mortgage Choice spokeswoman Jessica Darnbrough said most lenders would leave borrowers’ repayments at the higher level unless asked to drop them.
“Most banks will raise repayments as rates go up, but they won’t automatically cut them as the rates fall. They will send you a letter saying your mortgage rate will fall but you will continue to pay the same rate unless you otherwise say,” she said.
“If you don’t make the phone call, that’s forced savings for you.”
Maximise benefit from low rate ... Mortgage Choice spokeswoman Affairs Jessica Darnbrough.Source:Supplied
Ms Darnbrough said low rates made now a great time to repay off a mortgage faster because each payment could wipe out more of the loan balance.
“Yes, they are low now, but they won’t be low forever.”
Ms Hutchison said other ways to boost the effect of the rate cut included making even bigger extra repayments, keeping personal savings sitting in the home loan account via a redraw or offset facility, renegotiating a better deal with your lender, or shopping around.
She said most people kept all their accounts with one lender for convenience, which usually did not maximise their savings.
“If you can handle having different lenders for different products, it’s worth it,” she said.