While it might be tempting to put the extra cash from your rate reduction towards a new wardrobe or car, have you considered keeping your loan repayments at their current level?
It’s not hard to see why you benefit. Basically, the longer you take to pay off the principal amount of your loan, the more interest you will end up paying.
By increasing the amount of your monthly home loan repayment – or not reducing it when the Reserve Bank cuts interest rates – you could shave thousands of dollars off the total amount you end up paying.
You would also cut dramatically the time you need to repay the loan.
This is the safest and most commonly used mortgage reduction strategy in Australia – and it’s an extremely effective one. You only need to crunch a few numbers to see why.
For example, if you have taken out a $300,000 home loan, at a variable rate of 7.25 per cent over a 25-year term, your minimum monthly repayment sits at $2,168.42.
If your lender passes on a 0.25 per cent rate cut, this will bring your variable rate down to 7.00 per cent, with a new minimum monthly repayment of $2,120.34.
This represents a saving of $45.08 per month and while that might not have a huge impact on your financial situation, it could mean the world of a difference to your mortgage.
That additional $45 per month could potentially save you more than $21,370 in interest repayments and wipe 1.4 years off the life of your loan if you choose to include it in your current repayments rather than spending it.
It really is that simple.
And with a new found taste for saving, have you considered switching your loan repayments from a monthly to a fortnightly schedule?
This is another simple but effective mortgage reduction strategy that carries with it little to no risk at all.
So, how does it work? Well, there are 52 weeks in a year and therefore 26 fortnights – which gives you an extra month’s repayment each year.
By paying off your mortgage in fortnightly instalments, you could wipe more than four years off the life of a 25-year loan and save tens of thousands of dollars that otherwise would be spent on interest.
Unlike other mortgage reduction strategies that include the burden of having to actively manage your mortgage on a monthly – or even daily – basis, fortnightly payments can be set up as a direct debit so you can simply ‘set and forget’.
Best of all, once the additional payments have been factored into your budget, you will hardly notice any difference.