Maximise savings from a mortgage rate decrease

Click the play button to listen.

Transcription

Announcer: It’s 96.5, we’re your family’s number one. What sound would you like to wrap up your day with? Let me know, 1300-965-965 is the number to call or you can SMS me 0447965965, now we have our wonderful finance expert on the line, it’s Helen Baker. Evening, Helen.

Helen: Hey good evening, how are you doing?

Announcer: Good, thank you, now you’re going to sort of sort this interest rate info out for us and maybe put it in simpler words, is that right?

Helen: Yeah. Well I guess the luxury of it is that now people’s mortgages, their commitments could be reduced or at least the interest that they are being charged reduced. So this week the Reserve Bank lowered the rate so it makes it a historic rate. And for somebody who has a $400,000 mortgage a year, this is a saving of $1,000 interest a year, which probably doesn’t sound much.

But if you look at how petrol prices have come down enormously at the moment, we’ve got this reduced interest rate and these reduced petrol prices, so the family has probably, you know, got about $300 extra a month at the moment to do something with.

Now, the danger is that we’ll run off and buy shoes or something else, but—

Announcer: Love it!

Helen: What we probably should be doing is whacking that extra bit off the home loan because what will happen now is as interest is lower, most people are paying principle and interest as if they had a bigger commitment before this interest rate reduced so they’ll start to really hit into the principle which means then the interest is on a lower amount which means there’s less interest and you’re paying more which means you are hitting more principle, and that’s what we call the compounding effect.

So you often hear that these opportunities can save you normally a couple of years off the term of your mortgage if you do it right. So don’t spend that extra money on some fun things. I’m going to be a bit of a party pooper, and say whack it on your home loan.

Announcer: Well it does seem like the sensible thing to do. And it must be easy to do, I’m sure you can talk to your lenders or the bank people and say, actually I just want to keep doing it, or it probably just rolls over anyway, doesn’t it?

Helen: Yeah, you can—depends how everyone’s got them set up. If they’ve got offset accounts, if they’re paying interest only, it will depend on a whole range of things. But an opportunity at the moment is there for people to have a bit more money than they would have before, so it’s a great opportunity to do something that will have impact over the long term. So, take advantage of it and do something where you get a reward down the end.

Announcer: Well that is why you are our finance expert. Thank you very much, Helen.

Helen: You’re welcome.

Announcer: No worries, if you want to find out more, make sure you go to OnYourOwnTwoFeet.com.au.