The historically low interest rates means virtually all mortgage holders could pay at their bank’s “buffer” rate and potentially save hundreds of thousands of dollars, according to Smartline Personal Mortgage Advisors.
The “buffer” rate is about an extra 2% p.a. on top of the current home loan rate, and a lender uses it to assess if a borrower can afford a loan. Smartline’s strategy simply involves paying the monthly home loan rate at 2% more than the current rate.
“This is one of the most simple and effective debt reduction strategies that home-owners can use,” says Smartline’s Executive Director, Joe Sirianni.
For example, at 5.25% p.a., the monthly repayment of a $350,000 mortgage is $1,932.71. But at 7.25% p.a., the monthly repayment is $2,387.62 – an additional cost of $454.91. Therefore, paying an extra $454.91 a month means the loan would be paid off in 19 years and seven months, instead of 30 years.
It would also add up to a saving of $134,993 worth of interest, plus more if mortgage holders made ad-hoc additional repayments along the way, such as windfalls and tax returns.
“While this calculation is made on the assumption that the variable rate will stay at 5.25% p.a.., which almost certainly it will not, it does highlight the considerable impact that making additional repayments has on your home loan,” Sirianni says.
“While making higher home loan repayments might ordinarily be a stretch for some people, the historic low interest rates we are currently enjoying make this a strategy that pretty well everyone should be able to adapt.”
The RBA’s recent cash rate cut to 2.5% is the lowest level since 1959, while the major lender’s home loan rates are at their lowest since 2009.