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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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This article was reviewed by Head of Content Leigh Stark before it was published as part of RateCity's Fact Check process.

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Learn more about home loans

When does Commonwealth Bank charge an early exit fee?

When you take out a fixed interest home loan with the Commonwealth Bank, you’re able to lock the interest for a particular period. If the rates change during this period, your repayments remain unchanged. If you break the loan during the fixed interest period, you’ll have to pay the Commonwealth Bank home loan early exit fee and an administrative fee.

The Early Repayment Adjustment (ERA) and Administrative fees are applicable in the following instances:

  • If you switch your loan from fixed interest to variable rate
  • When you apply for a top-up home loan
  • If you repay over and above the annual threshold limit, which is $10,000 per year during the fixed interest period
  • When you prepay the entire outstanding loan balance before the end of the fixed interest duration.

The fee calculation depends on the interest rates, the amount you’ve repaid and the loan size. You can contact the lender to understand more about what you may have to pay. 

Cash or mortgage – which is more suitable to buy an investment property?

Deciding whether to buy an investment property with cash or a mortgage is a matter or personal choice and will often depend on your financial situation. Using cash may seem logical if you have the money in reserve and it can allow you to later use the equity in your home. However, there may be other factors to think about, such as whether there are other debts to pay down and whether it will tie up all of your spare cash. Again, it’s a personal choice and may be worth seeking personal advice.

A mortgage is a popular option for people who don’t have enough cash in the bank to pay for an investment property. Sometimes when you take out a mortgage you can offset your loan interest against the rental income you may earn. The rental income can also help to pay down the loan.

When do mortgage payments start after settlement?

Generally speaking, your first mortgage payment falls due one month after the settlement date. However, this may vary based on your mortgage terms. You can check the exact date by contacting your lender.

Usually your settlement agent will meet the seller’s representatives to exchange documents at an agreed place and time. The balance purchase price is paid to the seller. The lender will register a mortgage against your title and give you the funds to purchase the new home.

Once the settlement process is complete, the lender allows you to draw down the loan. The loan amount is debited from your loan account. As soon as the settlement paperwork is sorted, you can collect the keys to your new home and work your way through the moving-in checklist.

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 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 are the features of home loans for expats from Westpac?

If you’re an Australian citizen living and working abroad, you can borrow to buy a property in Australia. With a Westpac non-resident home loan, you can borrow up to 80 per cent of the property value to purchase a property whilst living overseas. The minimum loan amount for these loans is $25,000, with a maximum loan term of 30 years.

The interest rates and other fees for Westpac non-resident home loans are the same as regular home loans offered to borrowers living in Australia. You’ll have to submit proof of income, six-month bank statements, an employment letter, and your last two payslips. You may also be required to submit a copy of your passport and visa that shows you’re allowed to live and work abroad.

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.

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.

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 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.

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.