How you can pay off your home loan faster

How you can pay off your home loan faster

If your home loan lender is passing on a full or partial interest rate cut after the RBA slashed the official rate to 0.75 per cent, congratulations, not only are you one of the lucky ones but you now have the option to pay off your mortgage sooner.

By committing to the same monthly repayments instead of repaying less money every month, chances are you could shave months off your remaining loan term.

If your lender is passing on the full 0.25 per cent rate cut, you could potentially trim up to one year and seven months off your remaining loan term, according to RateCity data. As no one knows how interest rates could move in the future, this analysis is assuming the current rate will stay for the period of the loan.

While this is likely almost impossible, it's a good idea for homeowners to pay off more of their principal while the cash rate is low. It will mean that even when the rate hikes again; because that will likely happen - borrowers will still be better off.

How much sooner you can pay off your loan

Old rate

New rate after cut

Monthly repayment

Old remaining loan term

New remaining loan term

Time shaved off loan term

3.91%

3.66% (-0.25%)

$1889

30 years

28 years and 5 months

1 year and 7 months

3.91%

3.71% (-0.20%)

$1889

30 years

28 years and 9 months

1 year and 3 months

3.91%

3.76% (-0.15%)

$1889

30 years

29 years and 1 month

11 months

*Note: 3.91% is the average September variable P&I, owner-occupier interest rate on the RateCity database. Assumes a mortgage balance of $400,000.

Alternatively, you can take advantage of the short-term savings, if you don't mind your current remaining loan term.

To find out how much your payment can be reduced, take a look at the table below, or consider using our mortgage repayments calculator.

Savings after full or partial rate cut

Old rate

New rate after cut

Monthly difference

Annual difference

Mortgage balance $400,000

3.91%

3.66% (-0.25%)

$57

$684

3.91%

3.71% (-0.20%)

$46

$552

3.91%

3.76% (-0.15%)

$34

$408

Mortgage balance $500,000

3.91%

3.66% (-0.25%)

$71

$852

3.91%

3.71% (-0.20%)

$57

$684

3.91%

3.76% (-0.15%)

$43

$516

Mortgage balance $750,000

3.91%

3.66% (-0.25%)

$107

$1284

3.91%

3.71% (-0.20%)

$86

$1032

3.91%

3.76% (-0.15%)

$64

$768

Mortgage balance $1 million

3.91%

3.66% (-0.25%)

$142

$1704

3.91%

3.71% (-0.20%)

$114

$1368

3.91%

3.76% (-0.15%)

$85

$1020

*Based on a 30-year loan term.

Which banks and lenders are passing on the rate cut?

Not all lenders have chosen to pass the rate cut on to their customers, so consider yourself lucky if your lender has lowered rates in response to the RBA's October decision.

Here's a list of the lenders sharing the benefits of this week's rate cut.

Lender

Rate change

Lowest variable rate

Athena

0.25%

2.84%

Auswide Bank

0.25%

3.24%

Freedom Lend

0.25%

2.79%

Homestar

0.25%

2.74%

Liberty

0.25%

3.25%

State Custodians

0.25%

2.90%

U Bank

0.25%

2.84%

Hunter United

0.20%

3.09%

Reduce Home Loans

0.20%

2.69%

P&N Bank

0.16%

3.47%

AMP

0.15%

3.24%

Bank of Melbourne

0.15%

3.09%

Bank SA

0.15%

3.09%

Bank of Sydney

0.15%

2.96%

Bendigo Bank

0.15%

3.14%

G&C Mutual Bank

0.15%

2.79%

Heritage Bank

0.15%

3.07%

HSBC

0.15%

3.02%

ING

0.15%

2.99%

Loans.com.au

0.15%

2.88%

Macquarie Bank

0.15%

3.09%

ME Bank

0.15%

3.19%

My State Bank

0.15%

3.23%

NAB

0.15%

3.20%

Qudos Bank

0.15%

3.13%

RACQ Bank

0.15%

3.24%

RAMS

0.15%

3.86%

Resimac

0.15%

3.06%

St George

0.15%

3.09%

Suncorp Bank

0.15%

3.03%

The Mutual Bank

0.15%

3.73%

Tic Toc

0.15%

2.84%

Virgin Money

0.15%

3.09%

Well Home Loans

0.15%

2.82%

Westpac

0.15%

3.23%

ANZ

0.14%

3.24%

Australian Military Bank

0.14%

3.31%

Greater Bank

0.14%

3.33%

People's Choice Credit Union

0.14%

3.20%

Bankwest

0.13%

3.30%

Commonwealth Bank

0.13%

3.22%

Credit Union Australia

0.13%

3.20%

IMB Bank

0.13%

3.18%

Newcastle Permanent

0.13%

3.19%

Bank Australia

0.10%

3.18%

Bank of Queensland

0.10%

3.49%

*Accurate as of October 9, 2019.

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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 the difference between a fixed rate and variable rate?

A variable rate can fluctuate over the life of a loan as determined by your lender. While the rate is broadly reflective of market conditions, including the Reserve Bank’s cash rate, it is by no means the sole determining factor in your bank’s decision-making process.

A fixed rate is one which is set for a period of time, regardless of market fluctuations. Fixed rates can be as short as one year or as long as 15 years however after this time it will revert to a variable rate, unless you negotiate with your bank to enter into another fixed term agreement

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 however fixed rates do offer customers a level of security by knowing exactly how much they need to set aside each month.

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.

How long should I have my mortgage for?

The standard length of a mortgage is between 25-30 years however they can be as long as 40 years and as few as one. There is a benefit to having a shorter mortgage as the faster you pay off the amount you owe, the less you’ll pay your bank in interest.

Of course, shorter mortgages will require higher monthly payments so plug the numbers into a mortgage calculator to find out how many years you can potentially shave off your budget.

For example monthly repayments on a $500,000 over 25 years with an interest rate of 5% are $2923. On the same loan with the same interest rate over 30 years repayments would be $2684 a month. At first blush, the 30 year mortgage sounds great with significantly lower monthly repayments but remember, stretching your loan out by an extra five years will see you hand over $89,396 in interest repayments to your bank.

Remaining loan term

The length of time it will take to pay off your current home loan, based on the currently-entered mortgage balance, monthly repayment and interest rate.

What is a comparison rate?

The comparison rate is a more inclusive way of comparing home loans that factors in not only on the interest rate but also the majority of upfront and ongoing charges that add to the total cost of a home loan.

The rate is calculated using an industry-wide formula based on a $150,000 loan over a 25-year period and includes things like revert rates after an introductory or fixed rate period, application fees and monthly account keeping fees.

In Australia, all lenders are required by law to publish the comparison rate alongside their advertised rate so people can compare products easily.

What is a fixed home loan?

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.

What is a honeymoon rate and honeymoon period?

Also known as the ‘introductory rate’ or ‘bait rate’, a honeymoon rate is a special low interest rate applied to loans for an initial period to attract more borrowers. The honeymoon period when this lower rate applies usually varies from six months to one year. The rate can be fixed, capped or variable for the first 12 months of the loan. At the end of the term, the loan reverts to the standard variable rate.

How much of the RBA rate cut do lenders pass on to borrowers?

When the Reserve Bank of Australia cuts its official cash rate, there is no guarantee lenders will then pass that cut on to lenders by way of lower interest rates. 

Sometimes lenders pass on the cut in full, sometimes they partially pass on the cut, sometimes they don’t at all. When they don’t, they often defend the decision by saying they need to balance the needs of their shareholders with the needs of their borrowers. 

As the attached graph shows, more recent cuts have seen less lenders passing on the full RBA interest rate cut; the average lender was more likely to pass on about two-thirds of the 25 basis points cut to its borrowers.  image002

What is a standard variable rate (SVR)?

The standard variable rate (SVR) is the interest rate a lender applies to their standard home loan. It is a variable interest rate which is normally used as a benchmark from which they price their other variable rate home loan products.

A standard variable rate home loan typically includes most, if not all the features the lender has on offer, such as an offset account, but it often comes with a higher interest rate attached than their most ‘basic’ product on offer (usually referred to as their basic variable rate mortgage).

Interest Rate

Your current home loan interest rate. To accurately calculate how much you could save, an accurate interest figure is required. If you are not certain, check your bank statement or log into your mortgage account.

What is Lender's Mortgage Insurance (LMI)

Lender’s Mortgage Insurance (LMI) is an insurance policy, which protects your bank if you default on the loan (i.e. stop paying your loan). While the bank takes out the policy, you pay the premium. Generally you can ‘capitalise’ the premium – meaning that instead of paying it upfront in one hit, you roll it into the total amount you owe, and it becomes part of your regular mortgage repayments.

This additional cost is typically required when you have less than 20 per cent savings, or a loan with an LVR of 80 per cent or higher, and it can run into thousands of dollars. The policy is not transferrable, so if you sell and buy a new house with less than 20 per cent equity, then you’ll be required to foot the bill again, even if you borrow with the same lender.

Some lenders, such as the Commonwealth Bank, charge customers with a small deposit a Low Deposit Premium or LDP instead of LMI. The cost of the premium is included in your loan so you pay it off over time.

Does Australia have no cost refinancing?

No Cost Refinancing is an option available in the US where the lender or broker covers your switching costs, such as appraisal fees and settlement costs. Unfortunately, no cost refinancing isn’t available in Australia.