Should you reduce your home loan repayments when interest rates come down?

Should you reduce your home loan repayments when interest rates come down?

If your minimum loan payments have reduced, should you reduce your current loan payments?

Following the Reserve Bank’s Decision to reduce the cash rate in early February, Unicredit has also passed on a reduction on our standard variable rate.

The question then arises, just because your minimum loan repayment has reduced should you reduce your current payment amount?

The simple answer is if you can afford it, no, don’t reduce your payment amount. Why? Because in the long run you’ll save a lot of money.

Let’s imagine you took out a home loan for $400,000 in February 2014 on Unicredit’s ‘Classic’ standard variable home loan. Your minimum loan payments would be approx. $1,018 per fortnight.

As a result of the RBA cash rate reduction in March 2015 the interest rate on your Unicredit home loan has also been reduced, which means your minimum loan repayment amount required comes down to approx. $998.

You can then choose to reduce your payment amount and continue to pay your loan off over the remaining term at the lower repayment.

BUT what if you kept your payment amount the same? What benefit do you get?

The first benefit is that you will pay your loan off earlier. Assuming no further changes in interest rates, by paying the extra $20 per fortnight you will pay your loan off just under 2 years earlier.

This is because you will pay less interest. Assuming you reduce your payments you’ll pay approx. $360,825 interest until the end of the loan. If you maintain your current payment amount the total interest reduces to $342,147 – that’s a saving of $18,678.

What if you need access to your funds? One of the excellent features of our standard variable home loan is redraw. Any payments you make above the minimum amount required can be redrawn by you whenever you need it, for free! – so you still have access to those extra funds. Redraw is available 24/7 via Uniteller online banking, Smartphone Banking and Telephone Banking – easy!

The second benefit is that if rates go up again, your new minimum payment will not have to increase as much. If we assume that the next rate movement is an increase of 0.25%, this would mean your minimum fortnightly payment required would be approx. $1,021, however if you had maintained your existing payment amount after the previous rate decrease your new minimum fortnightly payment required will only be approx. $1,011. This is a result of the interest you saved by paying extra and bringing the principal balance down.

$10 per fortnight might not seem like a lot, but if interest rates continue to increase anything extra you’ve paid will continue to help keep your new minimum payments lower than they may have been if you only made the minimum payments. Add it up over the term of a loan and the savings can be substantial.

So which option is best for you? Ultimately, it’s your decision – but we can help. A Unicredit Lending Specialist is available to discuss the options available to you and your family. We have the answers to your questions so give us a call, send us an email, or come in and see us in person and let us show you how to save money and own your home outright much sooner.