What You Shouldn’t Do If There’s a Cut in Home Loan Interest Rates

Some analysts are tipping that interest rates will fall further by the end of the year, despite them already being at record lows. The Reserve Bank meets monthly to decide whether or not to change cash interest rates. If they do, home loan rates usually follow suit very quickly.

The minutes of the last Reserve Bank Board Meeting indicate that it will be “appropriate” to cut interest rates later this year if Australia’s unemployment rate rises and inflation remains low over the coming months.

If interest rates fall and you have a variable rate home loan, your repayments will automatically decrease if they have been set up that way. That would be good news, wouldn’t it?

The answer to that question is no.

While it may be tempting to lower your monthly repayment if interest rates fall so you can have more money to spend on other things, the smart thing to do would be to keep your repayments at the same level. That’s because if you lower your repayments, you won’t be reducing the term of your home loan.

But if you keep your repayments at the same level, every additional dollar you pay will help to reduce your loan balance and allow you to pay off your home faster.

Let’s do the maths for both scenarios.

 

Scenario 1: Lowering your repayments

Assume you owe $300,000 on your home loan at a variable interest rate of 5% and that you still have 20 years remaining on your home loan term. Your monthly repayments are $1,980.

The variable interest rate is cut by 0.5% and your new rate becomes 4.5%. Your monthly repayments would drop by $1,898 and you’d have another $82 a month to spend however you like.[i]

But if you do that, it will still take you another 20 years before you pay off your loan and own your home.

Scenario 2: Maintaining your repayments at the same level

Now let’s assume that you resisted the temptation to lower your monthly repayments and you maintained them at $1,980 instead when interest rates fell to 4.5% for the same loan balance and term outlined in Scenario 1.

If you’re disciplined enough to do that, you’ll pay off your home loan in 18 years and 9 months, rather than 20 years.[ii] In other words, you’ll own your own home 15 months sooner, and you wouldn’t have sacrificed anything really. After all, you’ve already been paying that amount, and what you’ve never had in your pocket, you won’t miss.

How we can help

At Fast Repay Home Loan, we help our clients to implement strategies so they can become debt-free and own their own homes as soon as possible. Whether you’re looking to take out a home loan or to refinance, we’ll take the time to understand your needs and goals so we can provide you with the best possible advice.

Call 1300 707 955 or email info@fastrepayhomeloan.com.au to find out how we can help you, and to secure your free consultation with a finance expert.

 

Sources:

[i] https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/mortgage-calculator#!how-much-will-my-repayments-be

[ii] https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/mortgage-calculator#!how-can-i-repay-my-loan-sooner

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