After years of feeling the squeeze on their home loan repayments, Australians are finally seeing interest rates coming down.
With that extra money now filtering through, it’s time to think about how to best use it. Exactly what you do could help you save $10,000 a year!
Here are a few ideas to make the most of your rate cuts.
1. Refinance your loan
Lower rates mean better borrowing power and increased competition by lenders for customers. As such, it’s a great time to consider refinancing.
You could double (or more!) the size of this rate cut – especially if your pay recently increased or your costs decreased, such as no more school fees after a child graduates.
Potential difference: $151.42 monthly savings by doubling the official rate cut to 5.55 per cent on a $500,000 mortgage.
2. Keep repayments the same
Just because rates have come down, doesn’t mean you have to pay that new amount.
If you can afford to, keep your repayments the same. The extra amount you’re paying will chip away at the principal loan balance faster, meaning the amount you owe decreases and less interest accrues in future.
Potential difference: $26,588.07 saved over 25 years on a $500,000 mortgage. Over time, the savings would be 2.37 years of interest saved = more than $60,000!
3. Pay down debts
Falling mortgage repayments means more money to put towards paying down other debts.
Start with high-interest debts first, such as credit cards or car loans – these balloon quickly if you fall behind and adversely affect your ability to refinance your mortgage or get a new loan.
Potential difference: $151.43 monthly savings by clearing a $1,634 credit card debt with average 20.08 per cent interest rate.
4. Reassess savings accounts
The flip side of falling interest rates is that savings accounts and new term deposits become less attractive.
It may be worthwhile reinvesting your savings somewhere with higher earning potential. This becomes increasingly important the more interest rates fall. You should also consider tax though.
Potential difference: $1.68 per month is small but this also excludes compound earnings investing $76.15 monthly at 7.5 per cent in sharemarket returns versus 5.25 per cent in a high interest savings account.
5. Top up your super
Your superannuation balance will grow faster with more money going in and compound earnings between now and retirement. Plus, there are generous tax breaks for making voluntary super contributions.
Potential difference: $23 extra per year (excluding compound earnings and tax savings which is the bigger saving) contributing $76.15 per month at average 8.1 per cent returns.
6. Upskill to boost your income
Extra cash can be used towards study or qualifications to boost future earnings. Or you could start a side hustle that could deliver additional income or even allow you to earn more than your current job pays.
Potential difference: Just a 5 per cent increase on the average $1396 weekly income delivers an extra $3629.60 per year. Self-education and self-employment costs are tax deductible too!
7. Invest in yourself
Investing in your health (physical and mental) has longer-term benefits: lower medical bills, fewer sick days, reduced risk of forced early retirement or premature death.
Potential difference: Thousands of dollars and a long, healthy life versus a shorter lifespan and/or poorer quality of life.
8. Boost your emergency fund
It’s easier to build an emergency fund – cash set aside for a rainy day – in smaller, regular amounts than big lump sums. Rate cut savings are ideal for this, as you’re already used to living without this money.
Potential difference: Immeasurable if it’s the difference between having money set aside or having nothing should disaster strike!
9. Donate to charity
If you’re going to spend your rate cut money no matter what, why not donate it to charity.
It will do some good for the world and give you the satisfaction that comes from helping others. Plus, you can claim a tax deduction on donations of more than $2.
Potential difference: A refund of up to 45 cents on every dollar donated, depending on your tax bracket.
As the above points show, there are plenty of ways to make rate cuts work even harder for you. The biggest difference will be whether you do something about it or let the savings fritter away!
Disclaimer: The information in this article is of a general nature only and does not constitute personal financial or product advice. Any opinions or views expressed are those of the authors and do not represent those of people, institutions or organisations the owner may be associated with in a professional or personal capacity unless explicitly stated. Helen Baker is an authorised representative of BPW Partners Pty Ltd AFSL 548754.
