Every time the interest rate on your mortgage is reduced, it’s an incredible opportunity. Are you taking advantage of it?
The RBA continues to lower the national cash rate and big banks and lenders are lending money at very low rates. Admittedly the average house price has sky rocketed, however for many homeowners (like me) it’s providing an opportunity to tighten the belt and use the lower interest rates to get ahead.
Like any good money saver, you need to plan ahead. If rates were to go back up, would you be prepared? In 20 years from now, will you look back and think that you missed an incredible opportunity to get ahead and use the low rates to your advantage?
Here are some ideas to get ahead each and every time your home loan interest rate gets lowered.
Pay down your mortgage: act like your interest rate is still high
A great way to save money and reduce your mortgage is to make always make higher then required repayments each month. I’ve found the easiest way to do this is to act like your interest rate is higher than it actually is. This means budgeting for a principle and interest repayment per month, as if your interest rate is 1-2% above what it is in reality.
Doing this makes it effortless to get ahead on your mortgage. Whenever your mortgage interest rate is lowered, pay no attention. Simply ensure your repayments are set to a certain amount per month and “set and forget”.
This is something I personally did 5-6 years ago when interest rates were nearly 8%. This little strategy has got me a couple years ahead on repayments as interest rates went into the high 3%’s only recently.
Scenario: $400,000 mortgage, over 30 years, paying principle and interest:
- Repayment on a 4% interest rate per month: $1,909.65
- Repayment on a 6% interest rate per month: $2,398.20
- Difference: An extra $488.55 per month
Over 12 months, this will add up to $5862.60 in extra mortgage repayments. Do this for 5 years and you will have paid off an extra $29,313. On top of this, every dollar you have in your mortgage account means less interest you have to pay – so the savings are actually far greater as the interest is calculated daily on whatever you owe.
Can’t afford an extra 2%? Consider something lower, even an extra 0.5% or 1% will make a difference.
Save the difference: use the savings to do great things and get ahead
Every time your interest rate drops, it’s very tempting to spend the money or enjoy it on frivolous things. In honesty, the RBA probably want you to do this – to stimulate the economy. The savvier savers out there however use the savings to do great things; build financial empires and get ahead.
Consider saving the money in a high interest savings account (ideally you should use your mortgage offset account or redraw to not only save the money, but pay less interest on your mortgage). Load the account up with your savings; there is something really awesome about watching a savings account grow.
- Scenario:If your monthly repayments drop by say $300 – if you were to save that for 12 months, you would have a nice little war chest of $3,600 in the first year.
- In five years, it would be nearly $18,000 plus any interest you have earned.
The thing to remember is that if you are using this strategy due to low mortgage interest rates, it means the high interest savings accounts are likely paying very little also.
Pay off credit card debts: use the savings to finally get out of debt
According to MoneySmart, the average Australian credit card debt is around $4,000. Consider using the money you save from a reduced interest rate to pay down (and hopefully pay off) your credit card debts.
The above scenario’s quickly showcase how in just 12 months, an average Australian could actually find themselves completely out of credit card debt if they used the money wisely. The trick to repaying your credit card is to ensure you don’t keep using it – so while you employee this strategy, be sure to cut up your card or do a balance transfer to pay even less interest.
Invest the money: use money to make more money
If you are lucky enough not to have credit card debt, you could also consider using the monthly savings to invest. Whether it be shares, managed funds, growing a business – the concept of using money to make money should be considered.
Investing in shares can often out perform any returns you would get in a high interest savings account given the rates will be low and the tax will be high.