I don’t know if you’ve noticed but interest rates on home loans have dropped a little recently and rates like 3.4% & 3.6% are being advertised.
We will hear on the news statements like,
“the reserve bank have decided to keep the cash rate on hold” or
” the reserve bank have dropped the cash rate by point .15%
So what does that mean for the everyday home owner and their home loan because it seems like sometimes the banks are quick to increase rates when the reserve bank announce that they are raising the cash rate but they can sometimes seem very slow to pass on an interest rate decrease.
Once we have managed to buy our homes with the help of a home loan from a bank, sometimes it is easy to just sit back and relax and make the payments but by doing that you could actually be paying way more than you need to do and a regular health check for your mortgage is something that might just save you hundreds, if not thousands of dollars.
For example….. let’s say I have a $400k mortgage and I have a 25 year loan at 4.8%. My monthly payments would be around $2292 per month if I am paying principal and interest and around $1600 if I am paying interest only. By shopping around it may be possible to get another bank to take over my mortgage at 3.8% but would that be worth it because it can cost $3-400 to refinance a loan?
Result…..Well let’s do the maths….a $400k loan at 3.8% over 25 years would have principal and interest payments of around $2067. When you compare that to the 4.8% loan repayments that’s a saving of $225 per month or $2,700 per year!! That’s a considerable amount of money .
But let’s look at a different scenario… say you refinanced but you continued to make your old payments so instead of paying $2067 you continued to pay $2292 – you’re used to paying it so why not….. What would be the benefit to you?
On a 25 year loan at that rate you would save yourself around $37k in interest over the life of the loan and you would reduce the term of your loan by 3 years 9 months! Yes that is over the life of the loan and we all know that interest rates go up and down but even in one year you save just short of $3000 so it pays to keep your eye on your home loan and see if you can get a better deal.
Let’s talk about how to get a better deal next week…