Why Ignoring the Recent Interest Rate Drop Could Save You 1.5 Years on Your Mortgage
As a mortgage broker, I’ve seen plenty of interest rate changes over the years, but the latest rate drop has everyone talking. While it’s tempting to enjoy the extra cash in your pocket, I want to share a smarter strategy: keep paying the same repayments and ignore the rate drop. By doing this, you could cut around 1.5 years off your home loan on a typical $800,000 mortgage. Let me explain why this approach is a win for your financial future.
What the Recent Interest Rate Drop Means for Homeowners
The Reserve Bank of Australia (RBA) recently lowered the official cash rate, and lenders have followed suit by reducing their interest rates. For homeowners, this means lower monthly repayments. On an 800,000homeloan,youmightseeyourrepaymentsdropbyaround800,000homeloan,youmightseeyourrepaymentsdropbyaround70 per month.
While $70 might feel like a nice little bonus, the reality is that it’s unlikely to make a significant difference to your day-to-day finances. Sure, you could use it for a meal out or a small treat, but there’s a far more impactful way to use this rate drop to your advantage.
Why Keeping Your Repayments the Same Is a Smart Move
Here’s the key: when interest rates drop, your minimum required repayment decreases. But you don’t have to lower your payments. By sticking to your current repayment amount, you can make a meaningful dent in your mortgage principal, saving you time and money in the long run.
Let’s look at an example to illustrate this.
Example: $800,000 Home Loan at 6% Interest
- Original Repayment: $4,800 per month
- New Repayment After Rate Drop: $4,730 per month
If you continue paying 4,800 instead of dropping to 4,800 instead of dropping to 4,730, that extra $70 per month goes directly toward reducing your principal. Over time, this small adjustment can have a huge impact.
How Cutting 1.5 Years Off Your Mortgage Can Transform Your Finances
By maintaining your current repayment amount, you could reduce the life of your loan by approximately 1.5 years. That’s 18 months of mortgage-free living you could enjoy sooner.
But the benefits don’t stop there. Here’s what else you stand to gain:
- Save Thousands in Interest: Interest is calculated on your remaining loan balance. By paying down your principal faster, you reduce the total interest you’ll pay over the life of the loan.
- Build Equity Faster: Paying extra toward your principal helps you build equity in your home more quickly. This can be a major advantage if you decide to sell or refinance in the future.
- Achieve Financial Freedom Sooner: Imagine what you could do with an extra 1.5 years of mortgage-free living. You could invest, travel, or simply enjoy the peace of mind that comes with being debt-free.
Why $70 Extra Per Month Isn’t Life-Changing
Let’s be real: $70 per month is a nice-to-have, but it’s not going to transform your financial situation. It might cover a couple of streaming subscriptions or a tank of petrol, but it’s unlikely to make a meaningful difference in your overall financial health.
On the other hand, using that $70 to pay down your mortgage can have a profound impact on your long-term financial well-being. It’s a classic case of short-term gratification versus long-term gain.
Tips for Maximising the Rate Drop
If you’re convinced that keeping your repayments the same is the way to go, here are a few practical tips to help you stay on track:
- Set Up Automatic Payments: Ensure your repayments remain consistent by setting up automatic payments for the original amount. This way, you won’t be tempted to spend the extra $70.
- Round Up Your Payments: If you want to go the extra mile, consider rounding up your payments. For example, if your original repayment was 4,800,rounditupto4,800,rounditupto4,850 or even $5,000. Every little bit helps.
- Review Your Budget: Take a close look at your budget to ensure you can comfortably afford to keep your repayments the same. If you’re struggling, consider cutting back on non-essential expenses to free up some cash.
- Consult Your Mortgage Broker: Your mortgage broker can help you understand how much you could save by maintaining your current repayments. They can also provide tailored advice based on your unique financial situation.
The Long-Term Benefits of Paying Down Your Mortgage Faster
Paying down your mortgage faster isn’t just about saving money—it’s about gaining financial freedom. Here’s how this strategy can benefit you in the long run:
- Retire Sooner: With your mortgage paid off earlier, you could potentially retire sooner or reduce your financial stress in retirement.
- More Investment Opportunities: Without the burden of a mortgage, you’ll have more disposable income to invest in other areas, such as shares, property, or superannuation.
- Peace of Mind: There’s something incredibly satisfying about knowing you’re debt-free. It’s a feeling of security and freedom that’s hard to put a price on.
Final Thoughts: Small Changes, Big Results
The recent interest rate drop is a golden opportunity to make a small change that could have a big impact on your financial future. By keeping your repayments the same, you could shave 1.5 years off your mortgage and save thousands in interest.
While it might be tempting to pocket the extra $70 per month, remember that this small amount won’t change your life financially. Instead, use it to pay down your mortgage and enjoy the long-term benefits of being debt-free sooner.
If you’re unsure about how to proceed or want personalised advice, don’t hesitate to reach out to us at startnow@sorenfinancial.com. Take a look at our effective interest calculator to see where you can see the affects of extra repayments as well as the ammortisation schedule which shows a break down of each mortgage payment (principal vs interest).
