So, you have all now heard that the RBA has reduced their interest rates by 0.5% and that the banks have decided to pass onto their customers whatever they consider reasonable to ensure their future profitability! I am not going to comment on this, other than to say that there is still a great deal of variance between deals offered at different lenders at present, and if you haven’t reviewed your home loan lately, now is definitely the best time to do so!
The real question is, what does the rate reduction, and potential for further reductions really mean to you? This example is really to show you how you could benefit from the rate reduction. In general terms, if you owed $350,000 on a home loan currently, and the rate was reduced by 0.5%, you could potentially reduce your minimum repayments by approximately $110 per month! I am sure most of you would enjoy the extra $110, but let’s face it you really couldn’t get a nice dinner out for two for that these days, so it is relatively insignificant in the monthly budget really.
However, if you were to keep you repayments at the same amount as they were prior to the rate reduction, you would be effectively paying $110 per month more than your true minimum repayment, which would put you in advance on your home loan. Typically your bank will not even reduce your repayment amount unless you ask them to after a rate reduction, but that is not a bad thing really. Why I hear you ask?
Well, if you were to continue to repay $110 per month in advance on your $350k home loan (assuming you have approx 25 years remaining on your existing loan), you would effectively save almost $40,000 in interest over the next 22 years, and save two and a half years of your loan term.
Better still, if you refinance your loan onto a product that saves you more than 0.5%, then you could save in excess of this. For example, the average rate from the big 4 banks prior to the rate reductions was approx 6.76%, and while this will reduce to approximately 6.39% with many of these lenders, we have access to variable rate loans from 5.99% with no ongoing fees.
On this basis, if you were to refinance onto the 5.99% product, and continue to repay the same amount you were on your existing loan, including ongoing fees, you could effectively be paying in excess of $200 per month more into your loan. If you were able to do this, you would save over $62k in interest and 4 years off your loan term, assuming you had 25 years remaining on your loan and a balance of $350,000.
On the contrary, if you were to refinance your loan onto a cheaper rate, and extend your loan term (like many lenders/brokers will do automatically), even on the cheaper interest rate you will end up paying $28,000 more in interest and take 5 years more to repay your loan. This is why it is so vital to speak to a professional lending specialist to strategies over your current goals and cash flow, and see how they can ensure that whatever option you take, you will be fully aware of the benefits of this strategy.
At loan Wize we do more than just find you a cheaper rate, we look at the big picture of what you want to achieve, and ensure that our advice is tailored to your personal needs and goals. We can’t wait to work with you, and save you money.