4 ways you can take advantage of falling mortgage rates

Posted: 11 July 2019 11:28 am

Home loan interest rates keep getting lower. Here's how you can make the most of it.

If you've not been paying attention to the mortgage market (and who could blame you?) you might not realise that we're in a time of very low home loan interest rates. And in the near future, they look to be going even lower.

Rates are dropping because the Reserve Bank has cut the cash rate not once but twice, lowering costs for banks. In response, many lenders have announced cuts to their variable rate home loans.

In short, lower interest rates mean borrowing large sums of money becomes cheaper, and that can be good news for people with mortgages.

Here are four ways you can take advantage of falling mortgage rates.

1. Do nothing and enjoy a lower variable rate

This only applies if you have a variable rate mortgage and your lender has decided to pass on the cash rate cut. If this is you then you're in luck, you don't really have to do anything because you're already enjoying lower repayments. Well done.

But you should probably still consider a few of the following tips.

2. Compare your current interest rate and refinance to a lower one

Whether your lender passes on the rate cut or not it's always worth comparing what's on the market. There are hundreds of lenders and thousands of mortgage products out there.

If you find a lower rate mortgage that suits your needs then switching to it could save you quite a lot of money.

To get a sense of just how low rates are right now you can check out our monthly lowest mortgage rates page.

3. Turn your lower rate savings into extra repayments

With a lower rate, your monthly mortgage repayments go down. There's definitely nothing wrong with pocketing those savings and doing whatever you want with them. However, if you use the savings as extra repayments on your mortgage you can get out of debt faster and save a lot more on interest in the long run.

All you need to do is keep making the same monthly repayments as before your rate went down. This means you're paying slightly more than you now need to, and that difference counts as extra repayments.

Let's use an example mortgage and calculate how extra repayments work. Say you borrow $400,000 over 30 years. Your original interest rate is 3.89%.

  • Monthly repayments at 3.89% = $1,884

If your lender passed on the full cash rate cut your rate would fall to 3.64%.

  • Monthly repayments at 3.64% = $1,827

That's a saving of $57 a month. If your rate fell to 3.64% but you kept repaying $1,884 per month that $57 would count as extra repayments.

Using our extra repayments calculator, and assuming that your rate fell in the third year of your mortgage, then that $57 a month would result in you paying $12,156 less in interest and ending your 30 year mortgage in 28 years and 8 months.

4. Build up a savings buffer for future rate rises

Your mortgage will probably be with you for a long time and while rates are low now they could definitely rise in the future. When they do your repayments will rise too.

You can use the savings from your lower repayments to build up a cash buffer to use if you need to cover higher repayments in the future. There are at least three ways you can do this:

  1. Redraw. If your loan allows for extra repayments and has a redraw facility then you could follow the extra repayment advice from tip 3 and then redraw the money if you need it later. Note that some lenders have restrictions on how much or how often you can redraw.
  2. Offset account. If your loan has an offset account you can simply put the savings there and they'll act like extra repayments, effectively helping you pay less interest. But if you need to cover higher repayments you can use it that way too.
  3. Savings account. You may want to save the money in a bank account and keep it for an emergency. This gives you freedom in how you use the money and is a good idea if your mortgage doesn't have an offset account.

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