Kin’s Money

The reserve bank has cut interest rates by 0.25% to 7%.

The question is what do you do now? Do you lower your repayments on your mortgage? Or keep them at your current level? Is it worth it?

The difference it will make to a morgage payment is $17 a month per $100,000 of mortgage (so if you have a $200k mortgage it’s $34 a month). The average mortgage of $250k will have the repayments reduced by $42 a month. Will $10.50 make a difference to your weekly budget? If you’re truly struggling it might. If you’re coping well with increased interest rates, fuel, food and all the other expenses that continue to rise, is it worth it to pay the extra off your mortgage?

On a $250k mortgage at 7% for 25 years, that extra $10.50 a week will save you 1 year and 5 months, and nearly $20k in interest. On a 30 year mortgage it will save 2 years and 3 months and over $32k in interest.

Ultimately what you do is up to you, but if you don’t need that $10 a week you may be better off leaving your repayments as they are.

Our loan is hovering around $84k at the moment, so the $4 a week we would save by lowering our repayments wouldn’t do much for us even if we were struggling.

Today the Daily Telegraph is reporting Wizard Home Loans to be the first lender to drop it’s variable home loan rate by 0.25%.

The Reserve Bank’s meeting this Tuesday is expected to cut rates, and now several lenders have promised to pass on any cut in official interest rates.

Mr Bouris, Chairman of Wizard Home Loans said:

“It’s a risk,… while [other banks] were very quick to hike their rates independently to the RBA when funding costs were increasing earlier this year, they are now just stalling - waiting until an announcement by the RBA.”

Which begs the question, will wizard also drop their rates by the same amount as any cut on Tuesday? Or will it claim this as its cut, running the risk of appearing hypocritical.

This news is good for homeowners, but not so much for savers. While several banks have passed on interest rate rises as higher rates on savings accounts, they seem to be quick to cut them alongside Reserve Bank cuts, while rising loan rates independent of official rises and not raising savings rates. And it seems that this trend is set to continue with at least one bank already cutting fixed interest savings accounts in the last week.

On a personal note, I’m looking forward to any rate cut, as that will help us pay our mortgage on our block of land off quicker. We also have an offset situation, and redraw, so all our surplus funds sit there saving us interest every day.

What are your thoughts? Do you have mortgages or savings? Are you looking forward to rate cuts?

This week the National Australia Bank (NAB) have committed to matching any cut in official interest rates next month. So far they are the only bank to do so, despite continued warnings from the government. Apparently the banks see the government as a toothless tiger in this scenario, and feel (probably quite rightly) that there is nothing the government could actually do that would encourage them to follow the NAB’s lead.

If your bank does pass on any interest rate cuts made next month, it is important to remember that those cuts will not necessarily pass on to you unless you ask for it. From the Canberra Times today:

MORTGAGE holders struggling with the rising cost of living will have to apply individually to their bank to have their repayments reduced, even if the lender passes on an interest rate cut.

This is because most Australian mortgage holders choose to make repayments in excess of the minimum required and these repayments do not automatically change when interest rates do.

So if you’re holding your breath for next months expected interest rate cut, remember to contact your bank and apply to reduce your repayment. Or, you could leave your repayments as they are, and simply pay off your loan quicker.