Since the GFC Australian’s have been taking advantage of the market to lock in low interest rates. This has led to a kind of complacency for many. When 5.5% interest rate already sounds amazing, and then it slides down further, why go looking for a better home loan rate? Is it worth changing banks for a few extra percentage points? Well, the answer is of course yes.
The average home loan in Australia last December was $444,000. At 5% interest you’re, paying off your loan over 25 years, you’re paying $2,600 per month. Drop that rate to 4.5% and you’re paying $2,470 per month. That’s a saving of $130 per month. Or $1,560 per year. (Please note I’ve rounded these figures for simplicity. Real savings will differ slightly depending on charges and fees. )
That probably sounds pretty good but maybe not enough to make you start applying for home loan quotes. Consider then, how loans really work. When you make a payment into your loan, much of the cost of that loan goes into paying off the interest. At 5% you’re paying over $330,000 in interest over the life of your loan. At 4.5% you’re paying nearly $300,000. At 4% you’re paying a little over $250,000.
In other words, a small drop in your home loan rate and you save nearly $100,000 over the life of the loan.
Most families could do with having that little bit extra in their pocket. That’s an easy one. Using the savings to help pay bills, save for a holiday or school fees is an easy decision. Life is always more complex than that though and our finances are intertwined. If you have a credit card debt for instance, you can use that money to help pay off that debt. Or even if that money allows you to cover expenses that might have have been put on a credit card. Then a multiplier effect comes into play. Not only are you saving money on your home loan, you’re now also saving money on your credit card. That equates to a real life saving that is vastly more than the figures we’ve already thrown about.
Let’s make the most conservative assumptions we can. Let’s say you invest your money over 25 years at an interest rate of 3%. You’ll still save over $50,000 over 25 years.
Small savings in rates give you money in your pocket. You can use that to help with your weekly finances or, if you’re in a position to do so, pay off your loan earlier. Looking at our rate of 4%, we could reduce our loan period down to 21 years while still paying about the same amount we paid at 5%. Total repayments on that loan then come down to around $210,000 (again, I’ve rounded down, in this case by about $2,000). That’s another gain in savings of nearly $40,000 over that 25 year period. And you have a total saving that is now well over $100,000 over the life of your loan.
Above we’ve made some assumptions:
Our final assumption is that you then invest the totality of your savings over the last 4 years of your loan. That is, invest the money you would have paid if you were still paying out your loan over 25 years. Once you’ve added that to your savings you will now save nearly $200,000 over the life of your loan.
That equates to net saving of over $300,000 over the 25 years of your loan.
For the sake of simplicity we’ve made some conservative estimates and we’ve rounded some figures. Finance and Loan is more than just home loans and with advice and guidance you could work your money a lot hard than investing it at 3% in a bank. Each loan is different, each person and each family, so real world savings will differ greatly. What doesn’t change is that great rates and a sound investment strategy can reap rewards well beyond what is apparently only $130 extra in your pocket each month. But hey, even if it is only $130 extra in your pocket each month, that’s still a night out. And life is about living.
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Foresight Concepts Pty Ltd – Credit Representative Number (CRN) 419214 & Australian Credit Licence number (ACL) 389328