Interest rates just got lower and there are some whispers – gradually developing into loud, challenging statements and well on the way to becoming bullish roars – that these rate falls may not be over and done with yet.
Some are talking about two, or even three further cuts, which would mean enormous savings and plenty of holiday cash in the pocket.
Some people are lamenting having locked their rates in at below 5%, something which would have been unheard of in the not-too distant past.
They should not be lamenting locking in rates below 5%, unless they want to move house or refinance and would be slugged with break fees.
Comparatively, below 5% is a rate people would have dreamed about a couple of years back…just ask anyone who fixed at 7% a few years ago; and there were plenty, believe me.
Besides, that’s not the point.
My issue is with paying as little as possible on a standard variable rate.
Smart homeowners are instead paying EXTRA money, by putting the money they don’t have to pay on interest, back into paying down their home loan of their own free will.
Therefore, they build a mortgage buffer for a rainy day, by which time they may not even have a mortgage anymore.
They will spend that rainy day under a luxury umbrella, or even on the other side of the world, in a tropical destination where it’s a sunny day.
Yes this is the perfect time to be proactive, but that doesn’t mean you should not be so at other times.
Even when rates are close to their long term average of around 7 per cent, it can be wise to make repayments closer to 9 per cent, to get out of debt and away from compound interest earlier, and to know you will be able to handle any sudden curve balls.
This shouldn’t be too hard, because when banks consider a loan application, they often use higher rates as a guide to assess your serviceability.
But why not go a step further and pay your mortgage at 9 per cent even while variable rates are around 5? Paying as much of your loan off earlier as you can means you will save even more in compound interest and will have access to more equity if you need it.
Tim McIntyre is the senior real estate reporter for the Daily Telegraph and News.com.au. Over the past decade, he has attained widespread knowledge of Australia’s many unique property markets and is an authority on all things buying, selling and investing. His commentary appears every Saturday in the Daily Telegraph Real Estate lift out, as well as online at news.com.au.