How home owners are cutting years off their mortgage with zero admin

Home owners could shave just over two years off a 25-year-mortgage if they keep their repayments the same as before the February and May interest rate cuts, modelling shows.

They would also save tens of thousands of dollars in interest over the term of their loan, ranging from $48,711 on a $500,000 mortgage to $97,422 on a $1 million loan, comparison platform Canstar found.

The Reserve Bank went against expectations on Tuesday by holding official interest rates steady at 3.85 per cent, leaving homeowners disappointed.

While the move surprised economists who had largely been expecting a cut, many tip further relief at the bank’s August meeting once more inflation data is available.

Despite Tuesday’s decision, home owners can use the two cuts so far this year to get ahead on their loan.

Many Australians may already be inadvertently paying over the minimum without realising, said Canstar’s data insights director Sally Tindall, as not all banks automatically lower minimum repayments after a rate cut.

“Three of the big four banks – CBA, NAB and ANZ – don’t automatically lower variable rate customers’ direct debits after a cut, even if they’re paying the minimum,” she said, adding that customers with these banks have to ask their lender to lower them.

Westpac is the only big four bank that automatically reduces repayments to the new monthly minimum unless a customer has opted to pay extra.

“While this might feel like the bank is making its customers jump through yet another hoop, what it does is encourage them to pay extra into their loan, a practice that will actually see them get ahead, rather than the bank.”

Mortgage holders on a variable rate should also be aware that “[the interest rate] should start with a 5,” Tindall said, adding that anyone paying above “should look to 35 different lenders offering variable rates under 5.5 per cent”.

If rates do fall another three times this year, home owners who keep their repayment steady could cut their loan terms by five years, the modelling found.

This would save a borrower as much as $84,670 on a loan of half a million dollars or $169,340 on a million-dollar loan.

But data from some of the big banks shows that despite interest rates falling, the vast majority of customers have chosen to keep repayments unchanged.

Figures released by the Commonwealth Bank on Monday show only 10 per cent of eligible homeowners chose to cut their direct debit payment after the May rate cuts. National Australia Bank’s data also shows more than 90 per cent of borrowers kept repayments on hold, continuing a previous trend.

An ANZ spokesperson said that since the February rate cut, 10 per cent of the bank’s customers opted to “reduce their repayments in line with their financial priorities”.

“Rather than automatically reducing repayments for all customers, ANZ provides the flexibility and support for customers to make informed decisions,” the spokesperson added.

Mortgage broker Chris Foster-Ramsay of Foster Ramsay Finance said he is seeing the same trend, with about 90 per cent of his clients paying the same for their mortgage as at the end of last year.

“They are wanting to get a bit ahead on their mortgage, put a home loan buffer in place – it’s positive to see this,” he said.

Westpac senior economist Matthew Hassan said the “pre-payment story has been a feature of Australian borrowers”, and goes “hand in hand with the rising use of mortgage offset accounts”.

“The extent of which a large portion of people are a long way ahead on their repayment speaks to a clear strategy for many borrowers,” he says. “Our data also shows that people have been saving 80 cents to a dollar in improvement on their incomes, which is relatively high … and that while new borrowing activity has picked up a little, existing borrowers remain conservative”.

Hassan emphasised that paying off the mortgage ahead of time may not be everyone’s goal, and that people should consider their individual circumstances.

“Yes, if it hasn’t been too much of a stretch and you’re used to operating within that budget, your total interest rate will be lower and you will be in a better position financially more quickly,” he said. “But if you’re maintaining your payments but sacrificing other aspects of your life, it’s not an ideal situation.”