Recent rate cuts could save mortgage holders $90,000: Joe Sirianni

The interest rate cuts of the past year, if fully utilised, could potentially save mortgage holders more than $90,000 in home loan interest and take nearly seven years off their loan term.

A series of interest rate cuts since May 2012 has seen the official cash rate reduce by 1.25%, with banks passing on about 1% of this.

Therefore, if you had a 30-year, $300,000 home loan at 7% back in May last year, you’re probably now paying around 6%.

This takes the required monthly repayment from $1995 a month to $1798 – let’s call it a difference of $200.

However, if you maintained your repayments at $1995, you could potentially save yourself more than $90,000 in interest and take six years and nine months off your home loan.

You end up paying about $257,000 in interest over the life of the home loan, rather than about $347,000, so you’re paying about 26% less in interest.

While this scenario assumes that the interest rate stays at 6% for the life of the loan, which isn’t likely, it does illustrate the power of making extra repayments off your home loan, whatever the interest rate may be.

It’s all about good habits and discipline.

If you’ve been used to making those repayments at that higher rate, it should then be reasonably painless to continue to keep them at that same level.

Chances are most people won’t even miss the money and the benefits of not touching that money now for a major long-term benefit should outweigh any pain.

You’re effectively giving yourself $90,000 of future lifestyle – money you can use to do something significant with for you and your family.

That’s a significant amount of money for pretty well everyone I know.

Any further cuts, either by the RBA or the banks themselves, to home loan interest rates would further compound the benefits.

Joe Sirianni is executive director of Smartline.