Bank the rate cut? Using falling interest rates to supercharge your mortgage repayments

Home loan interest rates have been falling, which means your minimum mortgage repayments might soon be about to decrease.

You might be looking forward to having some extra money in the bank in these tough economic times but it’s also worth considering whether you can use this opportunity to supercharge your mortgage repayments.

If you keep your regular repayment amounts the same when you roll onto a lower fixed rate and your minimum repayment amount falls, you could be mortgage-free years earlier and save huge sums on interest costs.

“We’re having a lot of these conversations with customers, and they’re sometimes really surprised by how much it can actually cut the term of their mortgage,” says Brooke Davies, one of Westpac’s Home Loan Experts.

“This obviously only applies to people who are finding their repayments affordable, but for those people, higher repayments can save them on interest costs in the long run.”

Maintaining your repayments could cut 10 years off your loan

Broadly, if interest rates drop by 2% from their 2023 peak of around 7.3% (1-year fixed), and you keep your repayments the same, you could cut around 10 years off the repayment time of a 30 year mortgage.

For example, if you have a $550,000 home loan over 30 years, at 7.5% your repayments would be $3,846 per month. If your interest rate fell to 5.5%, your repayments would lower to $3,123 giving you an extra $723 a month in the hand.

If you didn’t decrease your repayments though and kept paying the same amount, applying that extra $723 to the loan would pay off that mortgage in about 20 years rather 30.

As well as being mortgage-free 10 years sooner, rather than paying a total interest of $574,000 over the course of the 30 year loan, with the increased payments you’d only pay $346,000 in total interest – saving you about $228,000.

If applying the full amount to your mortgage might be a bit much, another option could be to perhaps split the $723 in half and pay an extra $360 above the minimum on your home loan and keep the other $363 for living costs.

In that case, your $550,000 home loan would be paid off more than six years sooner and the total interest would be reduced by more than $145,000.

This is a very simplified example, but it illustrates what an enormous impact additional payments can make over three decades. Even paying just $50 a month above the minimum on the loan above would knock a year off your mortgage and save you $26,000 in interest.

Flexibility means you’re not locked into higher payments

Choosing to make higher repayments than the minimum doesn’t mean you’re locked in for the term of your loan. You can dial back to the minimum repayment at any time, Brooke says.

“I recently had clients who wanted to smash out their mortgage as fast as possible, so they were planning to set the term to 10 years. But they also want to have a baby in the future. So I talked to them about setting the term to 20 years, but making the repayments at a level that would pay off the loan in 10 years.

“They liked the idea of having the flexibility to go back to the minimum payments if there’s some substantial change in their financial circumstances if a baby arrives.”

Any payment above the minimum can really add up over the years, she adds: “If you’re about to refix at a lower rate, do the calculations to see how much you could save with higher repayments. Then talk to your bank about getting the loan set up in a way that works best for you.”

Please note: This article is general information only. It does not take your individual circumstances and financial situation into account and does not constitute financial advice.