Home loan borrowers in Australia should maintain their repayments at higher rates and pay their mortgages sooner as this could lead to a golden opportunity, said Damian Smith, CEO of RateCity.
“It’s the best financial decision that they could make on a non-tax-deductible investment such as the family home,” he said.
He noted that nearly 1.1 million households just make the minimum repayment scheme on their mortgages. Of this, many are tempted to pocket the rate-cut savings to help with daily expenses.
However, borrowers can maintain the higher repayments, as this presents an opportunity to make interest savings and shortens the loan term.
Belinda Williamson, a spokeswoman from Mortgage Choice, said a borrower with a A$300,000 (S$379,846) mortgage over 25 years paying 7.25 percent could save as much as A$68,000 (S$86,097) in interest and cut two years and eight months from the loan term, provided repayments are maintained and the mortgage provider passes on the 0.5 percentage point cut.
Reports also indicate that mortgage holders are effectively earning an interest rate of seven percent after tax by paying more money into the mortgage compared to those paying the minimum repayment.
“’You would need to earn at least nine percent on another investment on which tax would have to be paid to be ahead,” said Smith. “Many people have their pay deposited into a savings account earning a pittance that is eaten away by tax on the interest.”
“’It’s always a good idea to ring the lender and say you want to leave the repayment on the current level,” he said, adding that salaries paid directly into the mortgage account is another way of saving interest and reducing the loan term.
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