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Property owners around the country are collectively rejoicing. After two rounds of official rate cuts from the Reserve Bank, many have just received notification that new rates are now in force and mortgage repayments will be reduced.
Looking at the Big Four banks, NAB’s standard variable home loan is now at 4.92%, ANZ and CBA are at 4.93%, and Westpac is at 4.98%. This is the lowest rates have been for some time. And, based on the average Australian home loan of $400,000 over a 30-year term, for many, the cuts will mean an annual saving of about $1,259. Or about $100 a month. All in all, it is something worth celebrating.
So, by all means pop a bottle of bubbles, but also consider these three things:
We’ve given you the average, but a home loan calculator or quick Google search will give you a personalised number based on your own mortgage.
If your repayments haven’t changed, don’t worry. Your lender will not automatically reduce your repayments without your permission.
You need to ‘opt in’.
And, if you’re on a ‘locked in’ rate, or an ‘interest-only’ loan you may not actually be eligible for a reduction. If you are not sure, talk to your lender.
All of the banks have reduced rates within coo-ee of each other but some of the smaller and less well-known lenders could be offering better deals, depending on your circumstances.
Now is certainly an opportune time for a home loan check-up. Mortgage brokers offer a free service and it’s worthwhile asking them to have a look around the market on your behalf.
Just remember, the lowest rate is not the only criteria to base your decision upon. Look for other loan features, too – like an offset account, or the ability to pay off lump sums without being penalised. Just think about what you need overall, so you get the best loan for you, not just the lowest rate. Also be aware that there can be costs associated with refinancing. Definitely do your homework first.
While having the cash in your pocket is undoubtedly tempting, if you’re coping with your mortgage repayments as they are, then there really is no need to change them.
Besides, if you keep paying more than you actually have to, you will pay off your loan sooner. Don’t forget that the lenders make money on the interest they charge you, so for them it’s good business sense to keep you paying off your loan over the full term.
BUT … If you keep paying an extra $100 per month (using the example above) then you can shave about three years off the term of your loan and save $28,000 in interest payments. So, based on these very generalised numbers it’s easy to understand that it is way, way, waaaaay better for you to whittle away that mortgage as quickly as you can. And to be honest, this is a golden opportunity to do just that. Because – and this is important – by paying more than the minimum you’re also building up ‘equity’ in the property. ‘Equity’ is best explained as your shareholding. The more principal you pay off, the more equity you have in the property, and this equity can be used down the track, for renovations, an investment property, a holiday…etc.
Property has historically been a solid investment over the long term and, as such, it’s a type of enforced saving.
If you haven’t already entered the property market, now is also an excellent time to buy, if you can. Prices have ‘cooled’ a little, and interest rates are low. Both of these are in favour of buyers and for first timers there are also some NSW Government incentives worth looking into.
But for anyone already benefiting from the rate cuts, the most sensible thing to do right now, is to refinance if it means you’ll be better off, or alternatively keep up your repayments as they are. It will make a difference in the long run.
The information contained in this article has been prepared without taking into account your individual objectives, financial situation or particular needs – it is GENERAL ADVICE ONLY. Before acting on any information in this article, I recommend that you consider whether it is appropriate for your individual circumstances.