4 ways to leverage low interest rates to pay off your mortgage and debts faster
by Helen Baker, Money.com.au
Each time your mortgage provider lowers your interest rate there is an opportunity to save money and pay off your home faster. With the RBA announcing record low-interest rates this year – currently at 0.25 per cent for the fourth consecutive month – there has never been a better time to tighten the belt and use low interest rates to get ahead. Below, I have outlined four ways to leverage low interest rates to pay off your mortgage faster, which can also help you get on top of your debts.
1. Pay down your mortgage by acting like your interest rate has not changed
A great way to save money and reduce your mortgage is to make higher than required repayments each month. One of the easiest ways to do this is to act like your interest rate is higher than it actually is. This means budgeting for a principle and interest repayment per month, as if your interest rate is one to two per cent higher, or if y
our mortgage interest rate is lowered just keep paying the same amount for each repayment.
For example, repayments at 4 per cent interest on a 25 year, $400,000 home loan would be $2121 each month, whereas at 3 per cent repayments would be $1907. The difference of $214 each month will accumulate to $2568 over a year – and more than $12,840 if you stick to this for five years to help pay off your loan quicker. On top of this, every dollar you have paid down in your mortgage means less interest you have to pay – so the savings are actually far greater as the interest is calculated daily on the remaining amount you owe.
2. Save the difference and use the money to get ahead
When the interest rate on your home loan drops, it can be tempting to splurge by spending the extra money. However, the savvier savers out there use the savings to bolster their finances, such as transferring the funds to a mortgage offset account or redraw account. This will not only save you money but will also reduce the amount of interest paid on your mortgage.
If your monthly repayments drop by $300, for instance, if you were to save that for 12 months, you will have $3600 in the first year. In five years, it would be nearly $18,000 plus any interest you have earned. The thing to remember is that if you are using this strategy due to low mortgage interest rates, it means the high-interest savings accounts are likely paying very little also.
3. Use the money to pay off credit card debts
Consider using the money saved from a reduced interest rate to pay down – and hopefully pay off – your credit card debt. As per the previous example, the average Aussie could pay off a credit card debt of $3600 by putting away $300 each month. The trick to repaying your credit card is to ensure you stop using it – so cut up your card or consider a debit card for those online payments.
4. Invest the cash to create a second income stream
If you are free of credit card debt, you may consider investing the money you are saving with low-interest rates. Whilst interest rates are low, you may want to seek financial advice about whether investing in shares, managed funds, or growing a business is appropriate for you. Seeking out guidance on this will give you a much better chance of profiting from the venture, as investing can often provide income and long term capital growth.
About Helen Baker
Helen Baker is a financial adviser, author, speaker and spokesperson for online finance information platform Money.com.au. Helen has a passion for empowering Aussies to find financial freedom through strategic planning and goals-based financial advice. She has worked as a qualified financial adviser since 2009 and was a finalist in both the Financial Planner/Advisor of the Year and Women’s Community Program of the Year categories in 2017 as well. For more information, visit Money.com.au.