$ 20 extra a week can save you $20,000

Even small amounts can make a big difference to the time it takes to pay your home loan, writes Sophie Elsworth

A DOUBLE cash rate cut in just two months is sending home loan rates down even further and saving borrowers large chunks of cash.

The Reserve Bank of Australia last week cut the cash rate to a record low of 1 per cent and has pushed some mortgage deals into the 2 per cent range.

Analysis from AMP Bank has found borrowers can save tens of thousands of dollars on their loans by upping repayments by as little as $20 per week.

It found that on a $300,000 30-year loan, a borrower who pumped an extra $50 per week into their repayments could save $44,150 in interest costs and pay off their loan five years and one month sooner.

A customer with a $600,000 loan doing the same could save $50,240 in interest costs and cut two years and 10 months off their loan.

AMP Bank’s director of retail solutions, Michael Christofides, said as interest rates continued to go down, borrowers should try and optimise these falls. “It gives customers the opportunity to pay a little bit more off their mortgage,” he said.

“If you can afford an extra $20 or $50 per week it can make a real difference over the long term on how quickly you can pay off your home loan.”

Mr Christofides said one of the easiest ways to scale ahead of your mortgage was to keep your repayments the same when interest rates fell, so you were chipping further into your principal.

Offset accounts – a daily transaction account sitting alongside your mortgage – are also a good way to reduce your overall interest costs.

On a $300,000 loan, if you have $10,000 in your offset account you will only be charged interest on $290,000.

Interest on loans is calculated daily, so making weekly or fortnightly payments helps save money rather than making monthly repayments.

Many home loan variable rates are in the low “3” per cent range so borrowers should check what deal they are on to ensure they are not paying too much.

Financial adviser Scott Haywood said some households could find it challenging to pay extra given we were “in a national wage freeze”.

“For households it can be very tough to put extra into their mortgage other than what they normally pay, because they haven’t had a pay rise in five years,” he said.

“Make sure you use your offset account and have all of your pay go into the offset to get the full benefit, and talk to your bank about getting the best rate.

“It may also be worth fixing a portion of your loan to get some certainty in your repayments.”