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Home loan rate cuts: how to budget the savings
By Tammy Barton

Cutting Debt Percentage Sign

In December, the big four banks passed along the Reserve Bank’s interest rate cuts to their customers. For the average mortgage holder, the saving represents around $50 a month.

People often ask me what they should do with the extra money and I always answer that it comes down to their particular priorities and circumstances.

Do you have any high-interest debt?

This is great opportunity to make a dent in any outstanding balances on your high-interest credit cards, charge cards or other loans. Consider this: Paying $100 a month, it will take more than four years to pay off a $3,500 credit card balance. Apply an extra $50 to your monthly payment and you’ll have the same balance down to zero in two-and-a-half years.

Do you have sufficient emergency funds?

Overuse of credit is often linked to a lack of savings. Without an emergency fund to fall back on, even small life changes and unexpected bills can lead to financial stress. If this sounds familiar, use your mortgage surplus to start building up your emergency savings. Have the money disbursed directly from your pay into a separate savings account or a redraw or interest offset facility attached to your mortgage (see below.)

Want to pay off your mortgage faster?

If you keep paying the extra money towards your mortgage, you’ll very likely take years and tens of thousands of dollars off your mortgage.

Many mortgages include a redraw facility that allows the mortgage holder to draw against surplus payments when a need arises. This is a great way to build up emergency funds while paying off your mortgage more quickly. A mortgage offset facility is similar—the balance of your offset account is subtracted from your mortgage balance, hence reducing the amount of mortgage interest you pay.

Saving for something special?

If you’re saving for something special, your offset/redraw facility is the place to do it. While you save for your holiday, car, new sofa, home renovations or whatever else, you can reduce the interest costs on your mortgage.

If your mortgage doesn’t include a free redraw/interest offset facility (in which case, it might be time to shop around for one that does), open a special savings account to save for your long-term goals.

Interest cuts are a good reason to review your budget

MyBudget clients can speak with our customer service team to review their budget and goals at any time to determine the best way to utilise surpluses. Your goals and priorities are important to us—we love helping you to achieve them.

Review your mortgage at the same time

If your bank hasn’t passed on the Reserve Bank cut, it’s definitely time to shop around. While rates are low, this could also be the perfect opportunity to consider fixing your mortgage for a period of time. Talk to your bank or mortgage adviser, or give MyBudget a call if we can refer you to one of our partner companies for a mortgage health check.

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