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Why now's the time to pay extra off your mortgage

Why now's the time to pay extra off your mortgage

With household spending slowing, real wages declining and construction also on a downward trend, it was perhaps not surprising that the Reserve Bank of Australia decided to leave interest rates unchanged at its June board meeting this week.

The cash rate remained on hold at 2.5 percent for the ninth consecutive month, and many economists are predicting it will stay put until the second half of 2015.

While hazy economic conditions are nothing to rejoice about, low interest rates are good news for everyone with a mortgage.

That’s because low interest rates provide the perfect opportunity for home owners to get ahead on their home loans by making additional payments towards their mortgages. When rates are low, your repayments are also lower – and therefore more affordable – which means you have more money left over than when interest rates are high.

A great thing you can do with that extra money is put it straight back in your mortgage.

Why should you pay extra?

Paying more than the minimum will help you pay off your mortgage faster because the extra repayments are going towards the principal of the loan rather than the interest.

Not only will you pay off your mortgage sooner, you will also pay less over the life of your loan because you will reduce the interest charges.

For example, if you owe $500,000 on your mortgage and begin paying an extra $250 a month five years into a 30-year mortgage, you will save $65,637.79 in interest and shave three years and 10 months off the life of your loan.

Making extra repayments is even more important in the first five to eight years of your mortgage, according to the Australian Securities & Investments Commission (ASIC). As ASIC states on its Money Smart website, most of your payments in those first few years go towards paying off the interest, therefore any additional repayments can make a huge difference in shortening the life of your loan.

You can RateCity’s online calculator to work out how much interest you can save by making extra repayments.

Are there any penalties?

If your home loan has a fixed interest rate, you may not be able to make any extra repayments without having to pay fees while other fixed rate mortgages will have a limit on the amount you can pay in extra repayments.

It’s a good idea to do your homework before you fix your interest rate, but if you have already, ask your lender if you can make extra repayments without penalty.

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