93% of home loan borrowers are making more than the minimum home loan repayments off the back of cash rate cuts by the RBA.
This is because currently, banks do not automatically adjust repayments.
Basically, if a customer is paying P&I (principal and interest) then when rates drop the repayment often doesn’t change. The customer is effectively paying more principal, and so the loan is paid off faster.
However, this means that customers still have the same amount of available money to spend, so the RBA rate drops didn’t actually affect the economy as much as expected.
It raises a good question.
Should banks do what is financially best for their customers (don’t change the monthly repayments)?
Or what is best for the RBA to manage the economy (drop the monthly repayments as rates drop)?
Note that interest-only loans always have their repayments drop when the rate drops.
Should banks do what is financially best for their customers?
I don’t think there is an easy answer for this one.
In a debate at The House of Representatives’ standing committee on economics, ANZ’s CEO Shayne Elliott argued that holding repayments at the same level irrespective of interest rate movements actually protects customers.
Currently, the bank’s default position is to hold the repayments at the same level and is commendable given that it is a cost to them.
He argued that instead of putting “customers into harm’s way for the national good”, making “the choice easy and obvious for them” as well as better communicating the chance “to review their interest rate and lower their repayments is a better way to go.”
He further added, “I think that’s for our customers to decide.”
Interestingly, previously when banks have automatically reduced payments, they’ve been criticised for doing so because it was only in order to keep their loan balances up.
Taking the decision away from borrowers and giving it to the banks is not a prudent strategy.
Considering that borrowers have carefully thought-out budgets based on their repayments. Ultimately, the decision should lie with the borrower.
How much extra are you paying?
If you had a mortgage of $500,000 (30-year P&I) at an interest rate of say 4.00% p.a., your minimum required repayment is $2,387.
After the three rate cuts (assuming your lender passed the full rate cuts), your new minimum required repayment would be $2,176. However, since repayments are not automatically adjusted, you’re essentially paying an extra $211 over the minimum.
If you’re still making the original repayment ($2,387), you’re paying off the mortgage 4 years earlier and saving roughly $44,000 in interest over the life of the loan.
You can also use our extra repayment calculator to work out your savings.
How can you reduce the size of your repayments?
Generally, lenders require the clients to call them directly or visit the nearest branch and request their repayments to be re-calculated based on the lower interest rate.
If you’re a Home Loan Experts’ customer, you can give our customer care team a call on 1300 889 743 or email us at email@example.com to do just that.
What do we recommend?
Generally, we don’t provide any direct advice or recommendation to clients. We simply provide them with the information and let them make the final decision.
We let the clients know that the extra payment that they’re making will contribute towards their principal and that extra repayments will be available as redraw. And, if they want to lower the repayments to the minimum required, we advise them about the process to do so.
In essence, we let the clients decide on how they would like to proceed based on their requirements.
We’re there with you over the life of the loan!
Our dedicated post-settlement (customer care) team will ensure that you are geting the best deal on your home loan now and in the future.
They do this by touching base with you periodically:
- 2-week check in to confirm your first mortgage repayment and set up internet banking.
- 3-month check in to confirm everything is okay.
- 1 year check in to remind you to increase the size of your payments to pay the loan off sooner. We also provide an evaluation of your property for free.
- 2-year check in regarding your interest rate. If it is not competitive then we will reprice their loan for free.
- 3-year check in and e-valuation.
- 4-year check in and repricing.
Speak with one of our award-winning mortgage brokers by giving us a call on 1300 889 743 or by filling in our short assessment form to have the best brokerage in Australia working for you.