KEY POINTS:
Mortgage interest rates are going to fall. It is true banks take about a third of their funding from institutions overseas and this is getting more expensive.
But a falling official cash rate should ensure your mortgage will be cheaper by the end of the year.
This will mean at some point soon you will receive a letter from your lender giving you the good news - your interest rate is lower so you can (if you want) adjust payments downwards.
Don't do it - do not reduce your repayments if you can possibly afford it. Keep your payments the same. This will have the effect of reducing the term of your mortgage while dramatically cutting the total amount of interest you will pay over the course of the loan.
Banks calculate interest daily. Every day you have their money, you pay for it. The best investment you can make - especially in these times - is to repay debt. The faster you repay debt, the more you will save and the better off you will be.
Here is an example of how this works out.
Jane has a mortgage of $300,000 over 25 years at 10 per cent. Her payments are $2726 per month and over the time of the loan she will pay interest of $518,000.
Interest rates reduce to 9 per cent. The bank asks Jane if she wants to keep her mortgage over 25 years her repayments can now be $2517 per month, meaning she will pay total interest over the course of the loan of $455,000.
This saves Jane $63,000 in interest over the loan term. Note the saving is because of reduced interest rates.
But Jane has been managing the original repayments quite well - the reduction of slightly more than $200 per month is not necessary for her. So, she tells the bank to leave the repayments at the original level.
Continuing her repayments at $2726 per month means she pays the loan off faster - 19.5 years instead of 25 years.
This means the total amount of interest Jane will pay falls to $338,000. That is a saving of $117,000 on the amount she would have paid if she had reduced the repayments.
These are real numbers - and real savings which go straight to your net worth.
You get this saving of $117,000 because you are paying more than the required amount - that is you are continuing to pay what you have always paid and declined the invitation to reduce your mortgage outgoings.
There will be some who find the reduced payments a relief - the cost of food and transport (and just about everything else) have risen and a lot of families have stretched budgets.
But, if you possibly can, keep your payments as high as you can - I can't think of a better way to save $117,000.
