August 02, 2011
With the latest Consumer Price Index figures coming in higher than predicted and mid-term inflation still a concern, talk is heating up about Australia's long run of cash rate stability ending during the next quarter.
Will today's Reserve Bank decision be the last breather for mortgage holders? How many are prepared for their repayments to rise?
Mortgage Choice spokesperson Kristy Sheppard said, "The official interest rate has remained steady for nine consecutive months now, a situation unseen for four years. How much longer this can last is anyone's guess but it is likely inflationary pressures will soon push the Reserve Bank into action, very possibly before the end of the year."
"Our message for those repaying debt at a variable interest rate is to celebrate today's cash rate outcome while taking a good look at your loan's financial buffer."
The broker surveyed over 800 recent first homebuyers in February to find 63% were making home loan repayments above the minimum required, with the most popular strategy being to put as much money into their home loan as possible and leave it there (33% of those).
Its more recent first time property investor survey found 73% of the 1,060 respondents, all of whom were buying an investment property before July 2013, intend to make repayments as if their home loan's interest rate is at least 1% higher. 49% will aim for 2% higher or more and 8% will aim for over 5%.
"Making higher than necessary repayments is a terrific way to prevent or at least reduce the stress brought about by interest rate rises," Ms Sheppard said.
"This not only prepares you to some extent mentally and financially for the budget squeeze of rate hikes, it's amazing the difference it can make to interest owed and to the loan term.
"There's always so much talk about mortgage stress but what about those taking ownership of their mortgage situation by planning ahead, building a buffer and managing carefully any extra debt they take on? A defeatist attitude gets you nowhere, and that extends to your home loan."
Consider a borrower with a 30-year $300,000 home loan at 7% who makes principal and interest repayments. By contributing an extra $50 each month from the five-year mark they will reduce interest owed by $23,422 and cut their loan term by over 18 months (presuming the loan and contribution details remain as is over the loan term). $100 extra per month will save $43,263 interest and almost three years and $200 extra will save over $75,000 and five years.
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