Recent rate cuts could save mortgage holders $90,000

Joe Sirianni puts up a fair argument in favour of low interest rates in his latest article for the Property Observer. Various rate cuts over the last 9 months have ensured that the cash rate has come down by 1.25%. Banks are generous enough to reduce our interest rate by 1%.

What this means is that instead of 7%, we have to pay only 6% on our home loans. Sirianni uses an illustrative example to show the effects:

A rate cuts savings example

Let us suppose you took a loan of $300,000 AUD in the month of May 2012. Also, let us further suppose that the loan is for a period of 30 years. Now, interest rates have come down to 6% presently. In effect, those paying $1,995 earlier only need to pay $1,798 now. This is a saving of $197.

To extrapolate, those who had to pay $347,000 in interests otherwise only need paying $257,000 now.  It is a clean saving of $90,000. Calculated in terms of percentage, this amounts to 26% savings. One must hasten to add that the interest rates may not remain 6% for the entire tenure of 30 years. Having said this, fluctuations both sides of this figure will even out over 30 years and this example then is a brilliant one to showcase the possible savings.

Sirianni further asks us to keep paying the same mortgage amounts. This is not a difficult task as we are habituated to making such payments. Just imagine, if we keep making the same payment (and not reduce our mortgage), we will have about $90,000 to spare by the end of the loan tenure.

What this means to us in the final run

I was thinking about it psychologically. Not only will we have the benefit of $90,000, we will also be forking out roughly $2,000 less every month (because our mortgage payments would be over by then). How good can this be for our financial health? The economy should keep getting buoyant from here and if we do not falter on fundamental values, we will have a lot of rate cuts coming our way in near future. It is certainly worth pondering over the savings that further interest rate cuts can promote.