We breathed a collective sigh of relief last week when the RBA reduced the official cash rate by 0.25 basis points to 4.50% per annum.
Naturally, we are all exicted about our monthly repayments reducing on our home loans. However, it would actually make more financial sense to leave your repayments as they are.
Your lender will pass on the rate reduction to your home loan, therefore reducing the amount of interest you will be charged daily. However, it is your responsibility to either reduce your repayments in line with the new rate, keep repayments as they are or change the frequency of the repayment. If you can afford to maintain your current level of home loan repayments, then you will be much better off in the long run. It will basically mean that you are paying back more than you need to. This will reduce your interest charged and the term of the loan.
Remember, just by making your payments weekly or fortnightly, you could reduce your loan term (on a 30 year loan) by up to 7 years.
Recently, we have seen some statistics that suggest that fixed rates are becoming more popular. They are even tipped to drop below 6% per annum. Fixing some of your home loan could give you peace of mind, in case of future interest rate rises. An investment loan could be fixed for the full amount, as you have the benefit of paying interest only for the fixed period.
Another benefit of the interests dropping is that the lenders use a buffer rate over and above the actual standard variable rate to work out your capacity to make repayments. When the rates drop, so does the assessment rate. This means that you can actually borrow more when the rates are lower.
If you have found that you recently applied for a loan, but was unable to proceed due to servicing of the repayments, then you should approach your broker again and ask them to do a new repayment worksheet to see if you now qualify.
Call the Diversifi Team on 1300 55 99 49 with any queries.
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