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Top 5 ways to take advantage of rate cuts

Top 5 ways to take advantage of rate cuts

A month on from the historic reduction of the cash rate to 2.25 percent, and the Reserve Bank of Australia (RBA) appears content with its move. Meeting on March 3, the RBA board decided — despite some predictions — to keep the cash rate as is for another month. 

This ought to get any Australian with a home loan and other types of debt thinking: With interest rates at never-before-seen lows, what can I do to take advantage of this situation? 

It’s not just a question for today. In his statement, Glenn Stevens, RBA Governor, suggested that more rate cuts could be on the table in the months ahead. So why not get planning now to better capitalise on this trend in the future?

1. Pay down your principal

According to Tim Lawless, CoreLogic RP Data’s Head of Research, last month’s cash rate cut brought the average standard variable home loan rate to 5.7 percent, and the average discounted rate to 4.85 percent – the lowest mortgage rates since John Gorton was Prime Minister! 

While you’re paying less interest on your home loan than you ever have before, rather than pocketing the change, put those savings toward making extra repayments on your principal. In fact, if you’re making interest-based savings on any other products, such as variable purchase rate credit cards, channel them to this purpose as well. 

2. Fix your mortgage

Just to be clear, we don’t mean mend your mortgage — there’s probably nothing objectively wrong with it. But with interest rates possibly lower than they were when you first carried out a home loan comparison, now might be the time to refinance and fix the rate. 

You’ve got a couple of ways to do this. You could fix the entire loan for the same low rate, ensuring that you pay less interest on your entire loan. Remember though, with a fixed rate you likely won’t be able to make added repayments. 

Alternatively, you could go for a split home loan structure. This way, you shield a big chunk of your loan from rate rises by fixing it, while putting the other part on a variable rate, giving you the flexibility to make extra repayments to your heart’s desire. 

3. Make a stash

When the RBA made its previous cut, Joe Hockey, Treasurer of the commonwealth government, praised it for giving an Australian family with a mortgage of $300,000 around $750 extra a year. Given that CoreLogic RP Data measured the median house price of the combined capitals at $525,000 for February(with some capitals well over this number), plenty of Australians should have a lot more to play with. 

Avoid the temptation to spend this bonus on a new TV. Instead, consider putting it into a high interest savings account  — by the time it matures, you could have a handy cash infusion for any number of purposes:

  • Putting toward a home deposit
  • Saving it for a rainy day fund
  • Paying down one of your loans

4. A super bonus for your super

Instead of putting the bonus sum into a saving’s account, you could also just as well put it toward your superannuation. In a sense, your super is one big savings account devoted entirely to your retirement. 

Whether you’re running an SMSF (self managed super fund) or are a member of an industry fund, you can make extra contributions to your super any time. These will be counted as ‘after tax’ contributions, and won’t be taxed when going into the fund — by coming out of your personal money, they will already technically have come under the tax man’s knife. 

5. Give it away now 

The savings you make from interest rate cuts don’t necessarily have to solely benefit you. You can also take a more altruistic approach and make a donation to:

  • A charity or cause you’re passionate about
  • Your former school or university
  • An organisation whose work or products you support

Of course, there’s something in it for you, too: You can claim a tax deduction on the donation or gift you make. Just be aware that the recipient must be considered a deductible gift recipient (DGR) by the Australian Tax Office. The Australian Business Register has a list of DGRs on its website. 

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Learn more about home loans

What happens to my home loan when interest rates rise?

If you are on a variable rate home loan, every so often your rate will be subject to increases and decreases. Rate changes are determined by your lender, not the Reserve Bank of Australia, however often when the RBA changes the cash rate, a number of banks will follow suit, at least to some extent. You can use RateCity cash rate to check how the latest interest rate change affected your mortgage interest rate.

When your rate rises, you will be required to pay your bank more each month in mortgage repayments. Similarly, if your interest rate is cut, then your monthly repayments will decrease. Your lender will notify you of what your new repayments will be, although you can do the calculations yourself, and compare other home loan rates using our mortgage calculator.

There is no way of conclusively predicting when interest rates will go up or down on home loans so if you prefer a more stable approach consider opting for a fixed rate loan.

What is a variable home loan?

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

What is the difference between fixed, variable and split rates?

Fixed rate

A fixed rate home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your repayments will be for the duration of the fixed term. There are some disadvantages to fixing that you need to be aware of. Some products won’t let you make extra repayments, or offer tools such as an offset account to help you reduce your interest, while others will charge a significant break fee if you decide to terminate the loan before the fixed period finishes.

Variable rate

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

Split rates home loans

A split loan lets you fix a portion of your loan, and leave the remainder on a variable rate so you get a bet each way on fixed and variable rates. A split loan is a good option for someone who wants the peace of mind that regular repayments can provide but still wants to retain some of the additional features variable loans typically provide such as an offset account. Of course, with most things in life, split loans are still a trade-off. If the variable rate goes down, for example, the lower interest rates will only apply to the section that you didn’t fix.

Does the Home Loan Rate Promise apply to discounted interest rate offers, such as honeymoon rates?

No. Temporary discounts to home loan interest rates will expire after a limited time, so they aren’t valid for comparing home loans as part of the Home Loan Rate Promise.

However, if your home loan has been discounted from the lender’s standard rate on a permanent basis, you can check if we can find an even lower rate that could apply to you.