Opinion
Play the rate cycle right, and you could save $242,700 on your mortgage
Nicole Pedersen-McKinnon
Money contributorThere are very few bets on a Melbourne Cup Day rate cut, but it’s important not to miss that Wednesday’s inflation reading was a winner.
Coming in at 2.8 per cent, the headline figure is now mercifully, finally back in the Reserve Bank’s target band of 2 per cent to 3 per cent … even if that isn’t quite the real story because it’s influenced by government energy rebates.
The odds are slim for a Cup Day rate cut, but economists are betting on a fall by February.Credit: Getty
If inflation continues its downwards trend, though, rates will begin to fall – most punters now believe in February. And that means a massive, probably once-in-a-mortgage opportunity to make savings.
Play the rate cycle right and the average Aussie mortgage-holder could turn just four rate cuts into $242,700 extra in their pocket. Here are the four down-cycle moves that could prove life-changing.
1. Stay the course
Now, I realise that keeping your repayments way up where they are today is about as appealing as a root canal. But that one simple thing – continuing to pay what you are already used to – will slash years off your time in debt … and you’ll no longer have to come up with a mortgage repayment every month. Imagine!
A downwards rate cycle, mid loan, is a gift for a mortgage holder. How much money could you turn it into?
Let’s put some numbers on the power, assuming you have a $400,000, 25-year mortgage at a rate close to today’s big bank average of 7 per cent. We’ll also assume that we swiftly get our four rate cuts.
If you just keep forking out the same amount, you will save $151,455 and shave almost four years off your loan term. Your extra payment will suddenly become $250 a month.
By the way: don’t keep paying the instant excess into your loan – be sure to redirect it into an offset account alongside it. This is for both flexibility and also to protect it.
2. Up stumps but still stump up
Say you’ve been paying a circa 7 per cent rate, but you refinance (or get a discount) to just 6 per cent, and then you enjoy the four rate cuts, bringing the rate down to 5 per cent.
Your savings go stratospheric – instead of the aforementioned $151,455 and busting out of debt nearly four years early, they leap to $242,700 and mortgage freedom seven years early.
Remember, that’s still for not one cent more than you are paying today, just at a far better rate of 5 per cent.
Indeed, Mozo data shows there are already several quality loans with rates that start with a ‘5’. The cheapest loan with a genuine offset account (mandatory for me, for the reason above) is 5.89 per cent.
Just a word of refinancing warning: now could be the worst time to fix, despite seductively low rates if you lock-in. That’s because official – and therefore variable – rates are expected to fall. Fixed-rate loans do not always carry offset accounts to safely house your extra, either.
Note too that with every rate cut, your ability to refinance grows … you get closer to passing the interest-rate stress test to qualify. But if you realistically have to pocket any savings, that sure is understandable.
However, you could try these two repayment tricks to still get ahead ...
3. Go fortnightly
By shifting your repayment from monthly to fortnightly, you take advantage of a quirk of the Gregorian calendar and end up paying just that little bit extra, somewhat painlessly.
By shifting your payments to fortnightly, you could save thousands.Credit: Dominic Lorrimer
What you do is halve your monthly repayments and make them fortnightly. That simple. This works because while there are 12 months in a year, there aren’t 24 fortnights, but 26. So you come out a full month ahead each year.
Which ultimately makes a huge difference. In the $400,000 scenario at 5 per cent, you’d go from paying $2338 monthly to $1169 fortnightly, saving $48,000 and obtaining debt freedom 3½ years early.
4. Round up
How about simply making the number neat? Even this will be effective. Since our model mortgage requires a monthly repayment of $2338, round it up to $2400.
From just that extra $62 – your stage 3 tax cut might be worth more – you’ll slash $17,167 off your loan interest and get out of debt a year early.
A downwards rate cycle, mid-loan, is a gift for a mortgage holder. How much money could you turn it into?
Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me, available at www.nicolessmartmoney.com. Follow Nicole on Facebook, X and Instagram.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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