Well, it’s official, interest rates were cut on Melbourne Cup day as predicted.
While we wait to hear whether all lenders have passed on the full rate cut – we figured it would be timely to look at a few ways you can buckle down and focus on repaying our home loans as fast as possible.
Here are some thoughts on how an interest rate cut can benefit your repayment plans.
What the rate cut means in dollars per month?
On a loan of around $300,000 – an average saving of $49 is made. It doesn’t sound like a whole lot of money, though if you pay that extra $49 per month onto your loan – you can save around $13K in interest and shave 1 year off your mortgage.
How can you use this rate cut to your advantage?
While some will opt to take the extra $49 cash in hand per month – the smart people will continue to let it be deposited onto their mortgage. Like we showed above, it shaves a hell of a lot of interest and time off your mortgage.
In fact, now is the time to pay even more towards your home loan. Why not stretch yourself to pay not only that $49 but an extra $50 per month on top of that? This would take you to a total of $99 a month and save you over $26K in interest and shave an extra 2 years off your mortgage. See our article on lump sum repayments to understand further.
Another thought is to scrap your savings account and start to use your mortgage redraw facility to host your savings. This saves you a tonne of interest and is tax-free, unlike that of a normal high-interest account. Although you don’t earn interest, you actually do one better – save interest that will otherwise accrue and cost you a fortune over the life of your loan.
Rates will likely never get this low again
So you know what that means? It means stop putting off your plans to repay your mortgage. Get disciplined and utilise these low rates to blast your mortgage. When interest rates are down, your interest charges are smaller – that means you can use every second of this rate cut to add all spare money to your loan and reduce the term significantly.
Maybe it’s time to hunt down a better deal?
If your lender doesn’t pass on the rate cut – take 5 minutes to explore your options with other lenders. It might be time to switch banks or lenders and find a better deal.