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The Downside to Interest Rate Cuts. Have you fallen for this trap too?

interest rate cutsFalling interest rates mean it’s likely you’re now paying less interest and your monthly home loan repayments have dropped.

This is good news for home buyers and home owners, right?



So how can there be a downside to lower rates if it means you’re saving money?

We’re not going to talk about the long term economic effects of low interest rates – perhaps that’s a discussion for another day.

But what we want to talk about is a sense of complacency we see in borrowers, especially at times when interest rates are low.

Yes, your interest rate may have dropped without you having to do a single thing about it. That’s great. But it doesn’t mean you should just sit back and do nothing else.

Yes, you may have a little bit extra left over at the end of each month now. But again, that doesn’t mean you should sit back and do nothing else.

Your responsibility to properly manage your household finances (specifically your home loan) remains, regardless of what interest rates are doing.

In fact, we’d argue that NOW is the time you need to get serious about getting your home loans sorted. Because NOW is the easiest time to get ahead.

It’s also what the majority of homeowners will NOT do.

And like most things in life, it’s the people who see opportunities for what they are – and then seek help from other to act on them – who will end up better off in the long run.

So, what are we actually talking about here?


What are some things you can do right NOW to leverage low interest rates?


1. Pay more into your home loan

This is not a new concept. We all know that if we paid a bit more into our mortgage with each repayment, we’ll save money over the long run. But if you really knew how much you could save, would you be more inclined to do so?

It’s likely that three months ago (prior to 2 interest rate cuts), you were making higher repayments. So if you continue to contribute that same amount into your loan now (when interest rates are lower), you’re going to get ahead on your home loan. Because with each additional payment, you’re reducing the amount you owe and therefore reducing the amount of interest you’ll be charged in the future .

You don’t even need to ‘officially’ change your repayment amount with the lender. Just set up an automated transfer each week/ fortnight/ month into your loan, in addition to the normal repayment that’s deducted by your lender. That way (only if you absolutely need to), you have the flexibility to cancel the additional payment anytime you like.


Let’s look at an example –

Let’s assume you’ve just taken out a $400,000 owner occupied loan, paying 4.33%p.a**, 30 year loan term, P& I repayments.


What happens if you pay an extra $20 a week into your mortgage:

Interest you will save over life of the loan:             $29,333

Time you will cut off your loan term:                       2 years and 5 months


What happens if you pay an extra $50 a week into your mortgage:

Interest you will save over life of the loan:             $63,802

Time you will cut off your loan term:                       5 years and 5 months


These are significant interest savings – even if you *only* decide to pay an additional $20/ week into your home loan.

The best news is that most of us wouldn’t need to change our lifestyles significantly to make that $20/ week payment.

It just requires a bit of a mindset shift and 5 minutes out of your day to actually set the automated payment. If $20 seems too much for you, just pick ANY amount you’re comfortable with.

The trick here is *actually* setting up the automatic payment. Because if it happens automatically, you won’t even think about it.


The best time to get ahead on your loans is whilst rates are low, because with each additional payment, you’re chipping away at the principal loan amount you owe. The idea being that when rates rise (eventually), you’ll have paid much more off your loan and rising interest rates will have little impact on you personally.



2. Use an offset account effectively

Again, offset accounts are not a new concept, but they’re not always used effectively.

An offset account works like a normal bank account, but any money you have sitting in the account reduces the ‘net debt’ you owe. The interest you’re charged is then calculated from this ‘net debt’ amount. The more you have sitting in this offset account, the less interest you’re charged on your loan.

If you’re not sure how an offset account works, you can find out more here.

If you want to make sure you’re maximising the offset account you already have, make sure you read this.



3. Switch to Principal & Interest Repayments

If you’re still making Interest Only repayments on your owner occupier loan, it’s probably time to switch over to Principal and Interest repayments. The rate of interest will be lower, your rate discount is likely to be higher and you will actually be paying down your loan.

Unless you have plans to rent out your owner occupied residence in the future (and even then, we’d probably suggest Principal and Interest is still a good option), paying a higher interest rate to make Interest Only repayments is not a strategy we tend to endorse in this current lending environment.

It will depend on your personal borrowing situation, but generally speaking you want to be enjoying the lowest rates possible whilst actually paying off your loan. (Alternatively, you need to ensure the cash you’re saving by *not* making principal and interest is being directed into something creating a higher returns for the same level of risk.)

Here you can find a detailed case study we published last year, on the benefits of switching to Principal & Interest repayments earlier than you need to (i.e. before your Interest Only period expires).



4. Convert to an Owner Occupied loan (and pay lower owner occupied interest rates)

We’ve helped thousands of clients buy property over the years and many of those clients have bought investment properties with a plan to one day move into. Sometimes it’s because they want to take time to sell their own place first. Other times they’ll buy an interstate property a year or two before they expect to move for a new job. And sometimes people will buy a ‘family home’ before they have a family, which may have a side benefit of being able to claim stamp duty taxation benefits. (Check with your accountant if this is something you’re thinking about too.)

Regardless, you need to remember to switch the loan over to an owner occupied loan once you finally move in to the property. Otherwise, you’ll continue to pay investment lending rates which tend to be higher.

Another prompt for this switch can be during a couple separation, where sometimes one party may move into the investment unit for a period of time. It’s generally a straight forward process with the lender (you will need to prove proof of residence), but very worthwhile in terms of the interest you can save.



5. Consider a Fixed Rate Loan

There are some extremely competitive fixed rate loans around at the moment. Whilst rate shouldn’t be the only reason to switch (because you won’t know for sure if you’ll save money with a fixed rate loan until AFTER the fixed rate period has expired), the rate offered will play a role in your fixed vs variable decision.

Something to keep in mind is that you don’t have to fix in all of your loan either – you can choose to fix a portion of your overall debt. There are also some lenders now who will allow you to link an offset account to your fixed rate loan, which might be something for you to consider.



6. Book in for a Home Loan Review

While each of the above steps will help you take advantage of the low interest rate environment (thereby saving interest, paying down your home loan faster), the easiest way to work out which step is best for you (it might be multiple!) is to book in for a home loan review.

You now know that there’s the potential to make significant savings, perhaps by making a few tweaks to your loans. And these savings are often more exaggerated if you’ve had your existing loans for a few years.

So what’s your next step?

Please don’t fall into the trap of thinking that because rates have dropped recently, things are now ‘all good’ with your home loans.

Just last week, we saved a single client over $11,000*** in interest per year, simply by reviewing his loans. This was ON TOP of the interest savings gained from the recent interest rate cuts. We identified a way this borrower could save money and after petitioning the lender on his behalf, we successfully negotiated over $11,000 in interest savings.

This was the result we obtained for just one client last week.

How are you feeling about the rate cuts now? Still happy that your loans are just ticking along?


It isn’t hard to save money. You just have to be smart about how you go about it.

Just say ‘yes’ to getting started.

Fill in your details here and we’ll be in touch.



*Please note – The above does not constitute financial or credit advice and does not relate to you personally. Before a personal recommendation can be made, a Preliminary Assessment must be conducted to ensure the recommended loan product is not unsuitable for your situation. Before you consider implementing any of the general strategies outlined above, we recommend you seek credit advice from an authorised Australian credit representative. Whilst all care has been taken to ensure the material presented here is factually correct and free from error, MO’R Mortgage Options Pty Ltd accepts no responsibility for any errors or omissions or misrepresentations of fact.

**There are much better rates available than this. We’re just using this as an example to show the power in taking small steps consistently towards better managing your money.

***This particular client had 5 loans with one lender. We negotiated with the lender to increase the rate discount across these 5 separate loans, which resulted in interest savings of $11,000 per year. There was no refinance or loan application involved.




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