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Pay down mortgages now to reap long-term gains
With interest rates at record lows, now is a great opportunity for borrowers to pay down their debts, according to a bank’s chief executive.
Pay down mortgages now to reap long-term gains
With interest rates at record lows, now is a great opportunity for borrowers to pay down their debts, according to a bank’s chief executive.
Sally Bruce, AMP Bank’s chief executive, has noted that recent rate cuts have put more money in the pockets of home owners, with the bank seeing “a significant uptick in the number of those customers opting to pay down their debt with the extra funds that they have”.
She said that while interest rates are at record lows, “there is no better time to pay down debt to own your home or investment property sooner”.
“Home owners are sometimes unaware of how powerful extra repayments can be – those who are able to increase their repayments now will pay less interest over the life of their loans,” the CEO said.
AMP Bank outlined that for home owners with an average 30-year $400,000 home loan – where the first five years are interest-only and the remaining 25 years are principal and interest – was to switch to paying principal and interest two years earlier, it would initially cost an extra $517 per month.
However, the bank said such borrowers would save $14,711 over the life of their loan as a result of starting to pay down their debt earlier.
According to the latest Reserve Bank of Australia lending rates data, average interest-only home loan rates are currently 50 basis points higher than principal and interest rates for owner-occupiers.
“Switching to principal and interest will cost home owners more in the short term, but over time the customer could save thousands of dollars in interest as a result of paying off their debt sooner,” Ms Bruce said.
“These decisions always come down to a customer’s personal circumstances and capacity in their budget, but if their situation allows it, the short-term pain may be worth the long-term gain.”
Other calculations highlighted by AMP Bank were:
If a home owner holding a 30-year $700,000 home loan, with the first five years as interest-only and remaining 25 years principal and interest, was to switch to paying principal and interest two years earlier, it would initially cost an extra $904 per month.
Over the life of the loan, they could save $25,740.
If a home owner with a 30-year $1,000,000 home loan, where the first five years are interest-only and the remaining 25 years are principal and interest, wanted to switch to paying principal and interest two years earlier, it would initially cost an extra $1,291 per month.
Over the life of their loan, the borrower could save $36,777, thanks to earlier paying down of debt.
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