The benefits of keeping repayments steady when rates go down
When interest rates fall, it’s tempting to reduce your loan repayments and use the extra cash for things you might have cut back on. However, it may be worthwhile keeping your repayments steady as rates decrease. Here’s how it might be helpful.
1. Pay less interest
Interest is typically calculated based on your outstanding loan balance. By making larger loan repayments, you can decrease the amount of interest charged over time. This can result in significant savings, especially for large, long-term loans like a home loan.
For example, on a $600k home loan, a 0.25% reduction in the interest rate (from 5.85% to 5.60%), could reduce your current repayments by $96 per month. However, if you decide to maintain your existing repayments instead of reducing your repayment, you could save up to $45,900 of interest over the life of your loan.*
2. Pay your loan off faster
Maintaining the same repayments when interest rates fall leads to faster debt repayment, potentially shaving years off the life of your loan.
3. Build up a buffer and be more financially resilient
Making a habit of higher payments during low-interest periods can prepare you for future financial challenges. By paying more than the minimum, you can build up a buffer if interest rates rise again, reduce the impact of future rate increases. It also means you’ll be better placed to cover unexpected expenses.
4. Improved equity and net worth
Equity is the difference between the current market value of your home and the amount you owe on your mortgage. For homeowners, maintaining loan payments above the minimum can help build equity faster.
For example, if your home is worth $300,000 and you still owe $200,000 on your mortgage, your equity in the home is $100,000 plus the appreciated market value of your home. The more you pay down your mortgage, the more equity you build in the property.
This can enable you to own your own home sooner, and might help in purchasing an investment property or other investments if that’s part of your financial goals.
Keeping your repayments the same when interest rates fall can be a powerful step toward financial freedom and peace of mind. It can help pay your loan off faster, reduce interest costs and build financial resilience. This can help you and your family secure a more stable and prosperous financial future.
We’re here to help
If you have any questions about how to maintain higher repayments on your loan, call us on 13 63 73.
This information is general only, does not consider your personal circumstances and you should consider its appropriateness & refer to the T&Cs, available on request, before acquiring the product. Fees & charges may apply & interest rates are subject to change.
