Clancy Yeates| 29 August 2016| Sydney Morning Herald
This month’s cut in official interest rates is set to put many homeowners further ahead on their mortgages, with new figures showing borrowers are using low rates to knock thousands of dollars off their home loans.
After the Reserve Bank cut official interest rates to a new record low this month, figures from two big lenders demonstrate customers have a growing safety buffer against a financial shock, because they are paying more than the minimum repayment.
RBA cuts interest rates
The Reserve Bank drops interest rates to a record low of 1.5 per cent.
Separate analysis shows a typical mortgage borrower would have paid off an extra $18,250 on their home loan if they had left their mortgage payments unchanged since the RBA began cutting interest rates in late 2011.
As interest rates have plumbed record lows in recent years, home loan customers have on average taken the opportunity to repay their bank faster, which slows growth for banks.
The trend is likely to pick up after the latest rate cut, as National Australia Bank, Commonwealth Bank and ANZ Bank have a policy of leaving customers’ mortgage payments the same when their monthly interest bill falls. Westpac is the exception – it drops the monthly repayments of its customers when rates fall where it has set up a direct debit.
NAB said that on average, its customers were nearly 15 months ahead of their minimum repayments, up from 14 months a year ago and 12 months in 2012.
CBA’s result this month also showed more borrowers paying off their mortgages ahead of schedule, with 77 per cent of customers ahead of their minimum payments at CBA. Including mortgage offset accounts, CBA customers were ahead by an average of 31 months on their loan repayments, up from 27 months a year earlier.
NAB’s general manager of home lending Meg Bonighton, said customers had the option of reducing their repayments, but the default for the bank was to leave repayments unchanged.
“Four years ago, the average home loan account was 12 months ahead on its repayments; today, it’s almost 15 months ahead. This is great to see, because it means our customers are closer to paying off their mortgages, and are paying less interest,” she said.
“When interest rates are reduced, the monthly repayment amount remains the same unless the customer requests to change it. Some customers do choose to reduce their repayment amount, while some choose to keep it the same.”
Over several years, customers can knock thousands of dollars off their loans keeping payments unchanged as rates fall.
If a customer with a $300,000 loan had kept their minimum monthly payments unchanged since the RBA began cutting interest rates in late 2011, they would be $18,250 further ahead on their mortgage principal, according to interest rate comparison website Mozo.
That assumes a 30-year loan with minimum monthly payments of $2108 a month and an interest rate equal to the average major bank standard variable rate.
While the trend points to an improvement in some households’ financial position, it also highlights the limitations of cutting interest rates as a way of boosting the economy.