AU Make the most of low interest rates while they stay low
Property Here - Saturday, January 04, 2014
There are some predictions that rates are set to increase over 2014, so it's crucial to make the most of the record lows that we're in at the moment, according to RateCity.
With the official cash rate at a record low 2.5%, and borrowers 1.42% better off than January 2012, or typically $262 savings each month, it might be the time to get started on that New Year's resolution of hacking through the mortgage.
The Reserve Bank of Australia, in passing the August rate cut, gave borrowers an extra $540 a year (on a typical $300,000 mortgage).
With five cuts since January 2012, it's the time of year to put extra money back into your mortgage, notes Alex Parsons, CEO of RateCity.
“If you are paying an average rate of 6 percent interest on your mortgage over time and you’re an average tax payer, you would have to find a financial investment with a greater than 10 percent rate of return elsewhere to better off – that’s a tough gig in the current market,” said Parsons.
“If you leave the extra money on the mortgage, it comes straight off the principal and it pays off your mortgage faster," he said.
Top tips to get more from low rates:
- Pay more than your minimum repayments: This will cut the amount you owe, shortern your loan's life and save you interest. (On a $300,000 25-year loan term, paying the current average standard variable - 5.41% - with monthly repayments, it could cost $547,850 principal and interest, with steady rates. Putting the savings back in will take six years off the mortgage and save $63,545).
- Refinancing the same loan to a lower rate variable home loan, such as at 4.49%, could free up $160 per month ($1,920 per year). If put back into the loan, that's $33,000 over 25 years saved without any lifestyle impact.
- Paying down non-tax-deductible debt first, such as credit cards, is a good first approach, with average interest rates on credit cards at 17%.