Low rates put borrowers 20 months ahead

Borrowers are now more than 20 months ahead on their home loans on average, thanks in part to record low interest rates, research has found.

The study by RateCity has revealed that a low interest rate environment has helped households to pay down their home loans more quickly than required.

“When rates drop you can lower your repayment amount and pocket the extra savings,” said Alex Parsons, chief executive of RateCity. “But you put it back into your home loan, not only will you build a buffer and pay your mortgage off sooner, it won’t be so much of a burden when rates eventually do go back up.”

For a borrower with a typical $300,000 home loan, being 20 months in the black is equivalent to having a repayment buffer of $35,740 up their sleeves, according to RateCity.

“A $300,000 home loan paid off over 25 years at a rate of 7 percent (historical average) could end up costing more than twice the initial sum at over $630,000, so anything you can do to reduce that is a good thing,” said Parsons.

“Paying more than the minimum and setting a goal of, say 15, years to pay off your home loan could meant savings of over $150,000 in interest.”

And it seems that many borrowers are doing just that, with results from a new RateCity poll revealing that 84 percent of people using the site are making extra repayments on their home loans.

While this is a good situation for borrowers, Parsons warned that indebtedness and gearing are still around historically high levels. He urged borrowers against becoming complacent.

“For those borrowers with high LVRs or who are paying the bare minimum, now is the time to be making headway on your loan while rates are at historic lows. Prepare now for higher rates, which will come; it’s not a matter of if, but when,” he said.

“If you’re struggling to find any extra money in the budget now while rates are low, then you could find that you’re really stretched when rates eventually rise. If this sounds like you, then consider your options now before things become difficult.”

One way to ease pressure, he said, is by refinancing into a lower rate loan, while fixing part of your rate could bring repayment security. If it’s still a struggle then you may need to think about downsizing into something more affordable.

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