Does 1% p.a. make a difference?

As a general statement Australians tend to be lethargic in reviewing their Home Loan once it has settled.  It generally takes another ‘trigger’ event, such as changing homes or renovating before we consider if there is a better loan option available.

Does this mean that many Australians are paying more interest on their home loans than they need to?  I would say in many cases this is definitely the case.

So lets consider a hypothetical couple called Bill & Beth.

Bill and Beth bought their home 5 years ago on a 30 year mortgage and have only been making the minimum repayments.  Their loan is now down to $250,000 and they have 25 years of their loan term left.  Bill and Beth are paying interest at a rate of 5.10% p.a. meaning that they are making monthly repayments of $1,476.

So what if Bill and Beth could reduce their loan interest rate by 1.00% p.a.?

As per the table below if they were able to locate a lender with a reduced interest rate of 4.10% they would immediately reduce their minimum monthly loan repayments by $143.  This reduction would actually save Bill and Beth approximately $42,700 over the remaining term of their loan!

 

Min Repayment Interest paid over life of loan
Current Loan Structure
$250,000 @5.10% p.a. 25 years $1,476 p/mth $192,823
Proposed Loan Structure
$250,000 @ 4.10% p.a 25 years $1,333 p/mth $150,030
Savings $   143 p/mth $  42,793

But what if Bill and Beth were able to reduce their loan interest rate by 1.00% p.a. and still maintain their current monthly loan repayments of $1,476?

As per the table below this would make a significant financial benefit to Bill & Beth.  They would reduce their loan term by approximately 3.8 years and save approximately $68,800 in interest versus their current loan structure.

 

Min 

Repayment

Actual 

Repayment

Interest paid over life of loan
Current Loan Structure
$250,000 @5.10% p.a. 25 years $1,476 $1,476 $192,823
Proposed Loan Structure – with additional repayments
$250,000 @ 4.10% p.a 25 years $1,333 $1,476 $124,002
Interest Savings $68,821

Obviously each borrowers circumstances are different, and the above example is general in nature.  However the moral of the story is that there are potentially many Australians who could be saving money on their mortgage.

If you would like advice on your specific situation I would suggest that you contact your local Mortgage Broker and request a home loan health check.

 

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