The Reserve Bank has handed you a huge opportunity. And I mean – at a conservative estimate – tens of thousands of dollars huge. There were months of media speculation about whether the commercial banks would pass on a Reserve Bank rate cut. When it came, they virtually fell over themselves to do so.
Assuming yours delivered the full 25 basis points, your required repayments will soon drop by about $17 a month for each $100,000 you have borrowed, or $43 for each $250,000.
With cost pressures seeming to grow by the day, that’s welcome news. It gets better, though. The cut takes the Infochoice benchmark variable rate (IBVR) – a weighted average rate that reflects the discounts people commonly receive on the quoted standard variable rate – from 9.3 per cent to 9.05 per cent.
That means you will now pay almost $13,000 less in loan interest over the life of a $250,000 home loan, $25,818 less on a $500,000 loan and $38,726 less on a $750,000 one (25-year term). But here’s where the enormous opportunity lies: if you can manage to leave your repayments at their current level, you will keep from the bank – and for yourself – far more. For example:
* What is now a $43 overpayment on a $250,000 mortgage will save you $17,000 in loan interest.
* What is now an $86 overpayment on a $500,000 mortgage will save you nearly $35,000.
* And what is now a $129 overpayment on a $750,000 mortgage will save you just under $52,000.
In all three cases you will also repay your loan a whole year early.
Bear in mind, too, that this is the effect of maintaining your repayments when there has been just one rate cut. Some economists are predicting more like four in the next year in a bid to stimulate economic growth and buffer Australia from the global credit crisis.
How would a full 1 per cent fall change the figures? If the IBVR moved from 9.3 to 8.3 but you held your repayments steady, you would save $49,408 in interest on a $250,000 loan, $98,305 on a $500,000 loan and $147,773 on a $750,000 loan. More…..