Many are already benefiting from this — some without even realising it
Australian homeowners who continue to make the same repayments on their variable rate loans following rate cuts earlier this year could significantly reduce the length of their mortgages and save tens of thousands in interest, according to new analysis by Canstar.
The financial comparison site found that by maintaining pre-cut repayment levels, borrowers could shave just over two years off a standard 25-year mortgage. For a $500,000 loan, this could equate to interest savings of $48,711, while a $1 million mortgage could see a $97,422 reduction over the loan’s life.
The Reserve Bank of Australia (RBA) surprised markets this week by leaving the cash rate unchanged at 3.85%, despite expectations of another cut. Economists now anticipate the next move may come in August, pending fresh inflation data.
Still, the two rate reductions already delivered this year provide an opportunity for mortgage holders to get ahead, particularly those on variable rate loans. However, many customers may not realise they are still paying above the minimum, as most banks do not automatically adjust repayments when rates fall.
“Three of the big four banks – CBA, NAB and ANZ – don’t automatically lower variable rate customers’ direct debits after a cut, even if they’re paying the minimum,” said Canstar data insights director Sally Tindall (pictured). “Customers with these banks have to ask their lender to lower them.”
Westpac stands apart as the only major lender that automatically adjusts repayments to reflect the new minimum unless the borrower has opted to make extra payments.
“While this might feel like the bank is making its customers jump through yet another hoop, what it does is encourage them to pay extra into their loan, a practice that will actually see them get ahead, rather than the bank,” Tindall said.
Canstar’s modelling shows that if interest rates were to fall another three times this year and borrowers continued to make the same monthly repayments, the term of a loan could be reduced by as much as five years. That would result in savings of up to $84,670 on a $500,000 loan and $169,340 on a $1 million loan.
Tindall also reminded mortgage holders to ensure their rate is competitive. “The [interest rate] should start with a ‘5’,” she said, recommending that borrowers compare lenders, with around 35 currently offering variable rates below 5.5%.
Major banks are reporting that most of their customers have kept their repayments unchanged since the February and May rate cuts. Commonwealth Bank data shows only 10% of eligible borrowers chose to lower their repayments following the May cut. Similarly, NAB said more than 90% of borrowers did not adjust their payments.
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