High times for low interest rates

With mortgage rates at their lowest since the days of black and white TV, this might be the right time to make a serious dent in your home loan.

Lower rates mean any money you have in the bank could be earning less interest. But if you have a variable home loan rate and your lender passes on the cut, you’ll pay off more of your loan faster just by keeping your payments the same.

Upping your payments means you can really take advantage of lower rates, saving time and money on your mortgage.

Adding an extra $50 a week can chop $50,000 from a loan of $400,000 – and pay off the loan four years earlier.

When fifty bucks seems a lot

If fifty bucks sounds like a lot, even twenty can make a dent in your repayments over time, as long as interest rates stay low.

That’s around one cup of coffee a day in a working week.

Because interest on home loans is calculated daily, even chipping in small amounts can make a big difference over time.

The table below shows how an extra $20 a week on a $300,000 loan takes over two years and $20,000 off. Further up the scale, an extra $100 a week slices off over three years and the best part of $100,000 over the life of the loan.

Of course, we’re all different. Whether you’re willing or even able to make extra repayments depends on your circumstances.

Good times, bad times

Depending on your situation and financial goals, a cut in interest rates may not be all good news.

If you have a fixed rate, your mortgage payments are unaffected by the interest rate cut.

If you’re unsure whether your loan is fixed or variable, now is a good time to check. If you’re on a fixed rate, you might talk to an expert to find out if there’s a better deal out there, or whether switching to a variable rate might work for you.

Other things you could do

There’s more to low interest rates than your mortgage.

For instance, you might instead choose to pay down bad debts such as your credit cards. Or use the money that you save on repayments to invest elsewhere to help grow your wealth.

This could involve alternatives to cash such as buying shares or property. These carry their own pros and cons, so it’s a good idea to get advice so you understand the risks involved, and whether they are right for you.

It all depends on your situation and financial goals. We can help you decide the best way to make the most of low interest rates.

First published 28 August 2019