It hasn’t been long since the last interest rate cut of 0.25% by the RBA. Has it affected you? If you have property loans, has your lender passed on the cut? In full? In part? If yes, what does that mean to you?
Imagine you’ve got a $400,000 mortgage on a property (your home or an investment). Let’s assume you are paying principal and interest on a 30-year loan. Before the cut, you may have paid the average interest rate of 5.64%. That’s a monthly payment of about $2306. If your bank passes on the interest rate cut of 0.25%, your monthly payments could drop to about $2243.
Pre-cut: Pay $2306 a month and pay it off in 30 years.
Post-cut: Pay $2243 a month and pay it off in 30 years.
Congratulations! You now have $63 extra per month to play with!
But what would happen if, instead of cashing in on that interest cut, you kept paying that $63 each month to your loan?
Post-cut: Pay $2306 a month and pay it off in 28 years and one month.
Wow. You have now gained yourself nearly 2 years of living mortgage free! It goes to show that small increases in your repayments (or not taking small decreases) add up in the long run. Now imagine you can spare an extra, say, $40 a month. Add that to the $63 you’re still paying and you’ll have your mortgage paid off within 27 years – a savings of three years!
If paying your mortgage off faster is a goal for you, you could also consider paying your mortgage bi-weekly (26 times per year) instead of monthly (12 times per year). You’ll add two extra payments a year, almost painlessly. You’ll save 5 years over the course of a 30-year mortgage this way.
Be careful, though, of accruing fees when changing payment amounts or frequency or any other terms of your mortgage. You may end up costing yourself more than you are saving!
And bear in mind that paying off a mortgage isn’t always the best thing to do – it depends on your goals and the structure of your assets and plans. We suggest you regularly review your assets and your debt. We can help with this.