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Mortgage Strategy Post RBA Rate Cut: Insights from Jessie Boyce
In light of the Reserve Bank of Australia’s (RBA) recent decision to cut the cash rate by 25 basis points to 3.85%, mortgage broker Jessie Boyce has shared strategies allowing homeowners to significantly reduce their home loan costs and pay off their mortgages sooner.
Current Market Adjustments
Following the RBA’s announcement, all of Australia’s Big Four banks have committed to passing on the interest rate cut fully to their variable rate mortgage customers. For borrowers who have been managing their repayments under tighter conditions, Boyce suggests a beneficial approach—maintaining the same repayment level despite lower interest rates.
“Many clients opt to keep their repayments steady,” Boyce stated in an interview with Yahoo Finance. “With the reduction in rates, this is an opportunity to get ahead without straining the household budget, particularly if they were already comfortable with higher payments.”
Potential Savings Through Higher Repayments
To illustrate the potential benefits, Boyce presented a case study involving an $800,000 mortgage at a 6% interest rate over 30 years. Monthly repayments in this scenario would be approximately $4,798. If interest rates were to decrease to 5.75%, repayments could drop to about $4,668, yielding a save of around $130 monthly.
However, if the borrower chose to continue paying the higher amount, they might reduce their loan term by nearly two years, resulting in savings exceeding $70,000 in interest over the lifetime of the loan.
“Even small additional repayments in the early stages can have a significant impact on the total loan amount and help build equity, offering more options in the future,” Boyce noted.
Timing and Strategy Considerations
This strategy seems to resonate with many borrowers, especially in the context of earlier rate cuts. For example, Commonwealth Bank revealed that only 14% of its eligible customers opted to lower their direct debit payments to the minimum following February’s cut.
Boyce emphasised that this approach is particularly effective for those who have some flexibility in their finances and do not require immediate cash flow relief. She explained it’s beneficial for borrowers with long loan terms or those who own their homes, as it enables them to build equity, setting the stage for future goals like renovations or investments.
Investors, however, must tread carefully. Boyce highlighted that making additional repayments on investment loans reduces the loan balance and, consequently, the interest that can be claimed as a tax deduction, potentially limiting tax benefits in the long run.
Alternatively, Boyce suggested placing extra funds into an offset account. This method decreases the interest owed while keeping the funds accessible, which maintains the deductibility of the loan for tax purposes.
Important Operational Notes from Banks
The Big Four banks will implement the reduced variable rates on various dates:
- CBA: Customers must initiate a change in direct debit.
- Westpac: Automatic reductions for those paying minimum and have direct debit.
- NAB and ANZ: Customers need to initiate a change in direct debit.
It’s vital for borrowers to check their options, as many might not notice an automatic change in their minimum monthly repayments.
Reviewing Home Loans
Boyce encourages mortgage holders to reassess their home loans in the current environment. “Many borrowers are still sitting with unnecessarily high rates,” she remarked, suggesting that a quick review could lead to substantial savings or at least a peace of mind.
Considering factors such as increased income or enhanced equity, borrowers may find themselves eligible for more favourable interest rates than those available previously.
Conclusion
The recent interest rate cut presents a timely opportunity for borrowers to either maintain higher repayments to reduce loan duration and interest or reassess their current mortgage deals. With effective strategies and mindful planning, homeowners can take significant steps towards financial security and freedom.
