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How low interest rates can cut years from your home loan

Superannuation  |  5/12/2016  |   3 min read

When the Reserve Bank of Australia (RBA) cut the official rates to a wafer thin 1.5% in August, home owners rejoiced. It took the cash rate to its lowest point in living memory, and gave home owners a chance to pay down their mortgage well ahead of schedule.

While these record low rates are a great opportunity, research by ME found over 50 per cent of home owners ‘never’ pay more than the minimum required by the bank. Let’s take a look at why these home owners are missing out on a golden opportunity.

Extra repayments – the key to getting ahead

Every time you pay more than the minimum repayment, the extra amount comes straight off the loan balance. That’s pretty obvious. But here’s where it gets worthwhile.

By lowering the loan balance, the interest charge for the following month is also reduced. So more of the next month’s regular repayment goes toward paying off the principal instead of covering interest costs.

In fact, paying a little extra off your home loan each month is one of the simplest and most effective ways to pay off your home sooner and save a bundle in interest charges. And you don’t have to pay a lot extra to reap significant long-term savings.

Small extra payments add up to big savings

Let’s say for instance, that a couple take out a $300,000 home loan with a 25-year term and a rate of 3.99%.

If the couple pay just $10 extra off their loan each week (that’s less than the cost of three lattes), they could save $8,806* in overall interest and be home loan-free one year ahead of schedule. If they can pay an extra $50 each week, they could slash $36,375 off their long-term interest costs and cut almost five years off their loan term. That’s a big return for a small outlay.

Finding the money for extra repayments isn’t always easy. While a quick review of your household budget might free up some additional cash, an even easier option is to keep your home loan repayments at their current level even if the Reserve Bank cuts rates again in the future.

In the meantime, ME offers an Extra Repayments calculator on their website you can use for comparison.

 

Article originally published by ME Bank. *Calculations are based on the ME Bank Loan repayments calculator.

This article is provided for general information only. It does not take into account your personal objectives, financial situation or needs and should therefore not be taken as personal advice. You should consider whether it is appropriate for you before acting on it and, if necessary, you should seek professional financial advice. Before making a decision to invest in the Equipsuper Superannuation Fund, you should read the appropriate Equip Product Disclosure Statement (PDS). 

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