Over the past year we have been lucky enough as home owners to receive numerous interest rate cuts courtesy of our friends at the RBA.
Many of the banks and lenders have in turn dropped their interest rates to provide some temporary relief to home owners and hopefully free up some cash for us to spend in the economy.
For me however, I have very different ideas about how to handle these rate drops. Here is how I am using the interest rate cuts to future proof my home loan, largely because I know that one day soon the rates will begin to rise again.
Nothing too good to be true last forever.
The catch 22 of interest rate cuts
The reason the RBA cut rates and push the banks to pass on the savings is to help stimulate the economy. It is to get Australian’s spending money, which in turn keeps people employed which in turn creates more money for businesses and Australia as a whole.
This is why the idea of using an interest rate cut to better pay off your home loan is a catch 22. It is personally good for you – while sort of stifling the economic plans of the country.
Bitter sweet or not, I don’t want to be in debt for the rest of my life, so I use the rate cuts to my advantage, even if it isn’t how the RBA are intending me to use it.
Get ahead on your home loan…while you can!
As the rates are historically quite low right now, many people have finally afforded the ability to buy their own home.
Rates won’t stay low forever and using this time to your advantage is key. I pay more than the minimum amount towards my mortgage every fortnight (best to pay fortnightly if you don’t already as it saves you interest) – this means I am ahead of schedule for repayments and aiming to pay my mortgage off in full, many years before I am meant to.
A dollar on your home loan is worth much more
The best thing about a mortgage and making extra repayments is that putting even a dollar extra onto your home loan gets you ahead. A dollar isn’t worth just one dollar on your home loan – it is worth much more as you are saving interest over many years.
This is why it is vital to be paying extra to your home loan. Imagine if someone said to you, ‘give me $5 and it will in turn save you $50’ – that is what it is like when contributing extra repayments to your home loan.
If interest rates were to rise, could you survive?
If rates are currently around 6-8% now – would you be able to afford your house if rates went back to 11-12%? I did the calculations on my own home loan and have to say – it scared the hell out of me.
Paying extra now while rates are low means a greater buffer on your home loan should rates rise again. No point plodding along in the good times if you can’t afford the bad times (which like anything financial, come and go quite often).
Why not set a goal for the year to get 6 months of extra repayments into your redraw facility? This means finding out what you pay per year, dividing by two and then dividing again by the number of repayments you make per year – this means you get a number that will tell you how much extra you need to pay per fortnight.
It may only be a small amount but it’s lasting benefit on your home loan will be huge.
Do you do this?
Are you someone who is using the low interest rates to your advantage? Tell us below your strategy.