Rate cuts an unexplored opportunity

By YIP | 20 Mar 2013

If they were fully utilised, the interest rate cuts of the past year could potentially save mortgage holders more than $90,000 in home loan interest and take nearly seven years off their loan term. 

This is according to executive director of Smartline Personal Mortgage Advisers Joe Sirianni, who said that a series of interest rate cuts since May 2012 has seen the official cash rate reduce by 1.25%, with banks passing on about 1% of this. 

Sirianni said that a mortgage holder with, for example, a 30-year, $300,000 home loan at 7%, which they had got in May last year, would probably now pay around 6%. This would take the required monthly repayment from $1,995 a month to $1,798 – a difference of about $200. 

If the mortgage holder continued to repay $1,995, Sirianni said he could potentially save more than $90,000 in interest and take six years and nine months off his home loan. 

While this scenario assumes the interest rate stays at 6% for the life of the loan, which isn’t likely, it does illustrate the power of making extra repayments off your home loan, whatever the interest rate may be. 

“If you’ve been used to making those repayments at that higher rate, it should then be reasonably painless to continue to keep them at that same level,” Sirianni said. 

“Chances are most people won’t even miss the money and the benefits of not touching that money now for a major long-term benefit should outweigh any pain.”

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