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How to Capitalise on Recent Interest Rate Cuts: Insights from a Mortgage Broker
Mortgage broker, Jessie Boyce, offers valuable strategies for borrowers looking to reduce their home loan costs following the recent decision by the Reserve Bank of Australia (RBA) to cut the cash rate by 25 basis points to 3.85%. This marks the second rate cut within the year.
Key Takeaways
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Maintaining Repayment Levels: Boyce recommends that borrowers consider keeping their repayments unchanged rather than reducing them. Many of her clients are choosing this approach, allowing them to save on interest and pay off their loans faster without straining their household budgets.
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Example of Savings: For instance, a homeowner with an $800,000 loan at a 6% interest rate over 30 years would typically pay around $4,798 monthly. If the interest rate decreased to 5.75%, monthly repayments would drop to approximately $4,668, saving about $130. By continuing to pay the higher amount, a borrower could potentially save over $70,000 in interest and reduce the loan term by nearly two years.
- Building Equity: Making higher repayments not only decreases the loan balance but also strengthens equity, which could provide more financial options in the future, such as renovations or investing.
Considerations for Investors
Boyce cautions that while this strategy can be effective, investors must consider the implications of making extra repayments into an investment loan. This can decrease the loan balance but might also limit tax-deductible interest payments over the long term.
An alternative strategy for both homeowners and investors is to deposit extra funds into an offset account. This maintains accessibility while reducing interest on the loan, and for investors, it preserves tax deductibility.
Bank Policies and Adjustments
The major banks have confirmed they will implement the interest rate cuts as follows:
- Commonwealth Bank: Customers must initiate changes to their direct debits.
- Westpac: Will automatically drop rates for customers making minimum payments with direct debits.
- NAB and ANZ: Customers need to take action to adjust direct debit amounts.
It’s important for borrowers to understand that not all banks will automatically adjust their minimum monthly repayments after the rate cut.
Timing for Rate Review
Boyce suggests that this is an ideal time for borrowers to reevaluate their home loan arrangements. Many may still have higher interest rates than necessary, and a review could lead to significant savings or at least reassurance regarding their financial position.
Borrowers who have experienced an increase in income or have built equity may now qualify for more competitive offers than last year.
Conclusion
In summary, the recent interest rate cuts present an opportunity for homeowners to reassess their repayment strategies. Whether maintaining higher payments or using an offset account, these approaches can lead to substantial long-term savings and financial flexibility. With careful planning and a thorough review of available options, borrowers can optimise their mortgage conditions to suit their financial health and future goals.
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