What I Would Do With the Most Recent Rate Cut

On Tuesday 3 May 2016 the Reserve Bank of Australia cut Australia’s official cash rate by 0.25% down from 2.00% to 1.75%. This cut was the first since May 2015 and represents a new historic low in Australia.

Luckily, most major lenders have quickly passed on this cut with some choosing to pass on less than 0.25% for their own business reasons. You now need to take a look at this cut and work out whats the best thing to do with your rate savings, especially if you are a home owner.

What would I do with this rate cut?

I would try and put the current rate cut and repayment savings to good use to get ahead on my mortgage. Here is an example of what you can expect to save if your bank passes on the full 0.25% cut:

Current Mortgage $380,000

Pre- Cut interest rate 4.50%
Past-Cut interest rate 4.25%

Pre-Cut loan repayment $1,925 per month
Post-Cut loan repayment $1,869 per month
Your Saving $56 per month

The above assumes a 30 year loan term

If your loan is currently sitting at $380,000 then you stand to save approx. $56 each and every month if your bank passes on the full cut.

Now, you could take advantage of that cut and do a few things with it:

  • Treat yourself and your partner to a nice dinner
  • Visit the cinemas with your kids
  • Put it towards a new pair of shoes

The above are nice to have’s but there is a better way to make use of this ‘free money’.

I would encourage my clients to keep paying their mortgage at the same level (eg. $1,925 per month) and use that saving to help payoff your mortgage quicker and reduce the overall interest costs. This may not sound as satisfying as the new shows each month but take a look at this:

If your original loan term was 30 years, by maintaining the $1,925 monthly repayment you will reduce your loan term down to 28 years and 3 months.

What you should also consider doing is putting in a little extra to further boost your savings and loan reduction. If you could put in another $100 per month so that your total extra repayment is now $156 then your loan term will drop to 24 years and 7 months.
You would save approx. $66,000 in interest costs over the life of your loan and reduce your loan term by 5 years and 5 months!

Small changes can make a big difference to your largest financial commitment. Make good use of the ‘free money’ you obtain via this rate cut and you can really get ahead on your home loan.