No rate change but borrowers 20 months ahead on home loans

6th of November 2013 | by Laine Gordon

Borrowers are now more than 20 months ahead on their home loans on average, thanks in part to record low interest rates, Australia’s leading financial comparison website RateCity (www.ratecity.com.au) has found.

Despite no rate cut at today’s penultimate Reserve Bank board meeting, a low interest rate environment has helped households to pay down their home loans more quickly than required.

Alex Parsons, CEO of RateCity.com.au, said for a typical $300,000 home loan repaid over 25 years at the average basic variable interest rate of 5.19 percent, that’s equivalent to having a repayment buffer of $35,740 up their sleeves.

“When rates drop you can lower your repayment amount and pocket the extra savings. But if you put it back into your home loan, not only will you build a buffer and pay your mortgage off sooner, it won’t be so much of a burden when rates eventually do go back up,” he said.

“A $300,000 home loan paid off over 25 years at a rate of 7 percent (historic average) could end up costing more than twice the initial sum at over $630,000, so anything you can do to reduce that is a good thing.”

And it seems that many borrowers are already ahead of the curve, with results from a new RateCity poll revealing that 84 percent of people using the site are making extra repayments on their home loans.

“Paying more than the minimum and setting a goal of, say, 15 years to pay off your home loan, could mean savings of over $150,000 in interest.”

While this is a good situation for borrowers, Parsons warned that indebtedness and gearing are still around historically high levels.

“This is a good news story, but Australians shouldn’t get complacent. For those borrowers with high LVRs or who are paying the bare minimum, now is the time to be making headway on your loan while rates are at historic lows. Prepare now for higher rates, which will come, it’s not a matter of if, but when.

“If you’re struggling to find any extra money in the budget now while rates are low, then you could find that you’re really stretched when rates eventually rise. If this sounds like you, then consider your options now before things become more difficult – one way to ease pressure is by refinancing into a lower rate loan, while fixing part of your rate could bring repayment security. If it’s still a struggle then you may need to think about downsizing into something more affordable.”

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