Time to read : 4 Minutes
We are three rate cuts into a downwards interest rate cycle… and that now means a massive opportunity to slash your mortgage.
I’m talking early debt-freedom.
In my experience, you have three main strategy options… and each one of them saves you successively more money.
Let’s look at them in order from the least to the most you could keep from the bank and in your pocket.
Option 1: Take the cash and run… or more accurately, run your now-more-expensive life
To show you the possible savings you can make, I’ll use the average home loan amount as reported by the ABS: $659,922.
The first vital number we’ll need is the average home loan rate before the cut – spoiler alert: you can do way better. This was 6.4% and it’s now 6.15% and nearly all lenders have passed on the cut.
So on that average home loan amount, based on 25 years, the minimum monthly repayment was $4,415, but has just fallen to $4,313. So that’s $102 more in your hand after this most recent cut.
And if you add in the other two cuts that’s $306 you’re now saving each month.
If you’re struggling with the cost of living then this is no doubt welcome money back into the household budget. But there is a way to multiply this money if you can afford to put it to use on your mortgage…
Option 2: Keep your repayments the same for earlier and cheaper mortgage-freedom
As the first two rate cuts were at the beginning of the year – and you may have already ‘absorbed’ them by taking advantage of the lower rate – we’ll next look at your bottom-line benefits even if you only deploy your latest cut more smartly.
Instead of pocketing the money you save on your loan, let’s say you just keep stumping up the same amount onto the mortgage before the cut was applied.
That now ‘over-payment’ of $102 would see your total interest bill go from $633,859 to $594,821 across a 25-year home loan.
If you do that, you could save $39,038 in interest and shave over a year off your loan term.
What’s important here is that this is $39,038 more in savings than if you had only benefited from the interest saving from the rate cut alone – because you are now also making extra repayments by overpaying. And it’s not costing you a cent more than what you’re already used to paying.
But wait, there is an even smarter way to play an interest down-cycle…
Option 3: ‘Up stumps but still stump up’ to slash your interest and time in debt
The pure genius move – and often it’s an opportunity you only get once in a mortgage – is to ‘ditch and switch’ your loan.
Sure, you have just had one Reserve Bank rate cut recently… but what if I told you it’s possible you could give yourself four more?
The average mortgage interest rate is just that: very average. Meanwhile, there are quality, comparable mortgages available with interest rates just above 5%.
It’s a debt-busting game changer when you realise that the interest rate gap between the average interest rate and the best home loan is typically 1% or 100 basis points. And that’s 100 basis points that you could keep and make even more of.
So, let’s look again at that average home loan that had an interest rate up at 6.4% before the latest cut, to one that’s just 5.15% today.
It doesn’t sound like much but it’s surprising how that little percentage change can save you money and time on the life of your mortgage.
By refinancing to an interest rate of 5.15% for the average loan amount of $664,486, the interest for the life of the loan reduces to $514,798.
Now if you were to keep making the same repayments – that you were before the cuts – while switching to a 5.15% interest rate, you would save a whopping $117,137 in interest over the life of the loan.
Bottom line
If ever there was a time to refinance, it’s now. And that’s because, right now, you can turn it into debt-freedom far earlier and far cheaper and refinancing these days is much quicker and easier than it used to be.
If the bulk of economists are right, and there are a couple of rate cuts still to come, you may even be able to turn it into more savings in money and time.
And that’s life changing, so if you can grab one of these options while you can as a downwards interest rate cycle really can give you a golden ticket to mortgage freedom that much faster and at less cost.
Go deeper:
Money secrets: could these mistakes be costing you thousands of dollars?
Why the structure of your investment property loan can make or break your success
Financial Disclaimer:
The information contained on this web page is of general nature only and has been prepared without taking into consideration your objectives, needs and financial situation. You should check with a financial professional before making any decisions. Any opinions expressed within an article are those of the author and do not specifically reflect the views of Compare Club Australia Pty Ltd.
