This month Aussie homeowners breathed a sigh of relief as the RBA announced a rate cut of 50 basis points, the banks passing on an average of 35 basis points to mortgage holders.
I have to admit, our interest rate is fixed, so we don’t benefit directly from this month’s rate cut – that’s how it is when you decide to fix your interest rates. It’s interesting that the banks are cutting their savings account interest rates by the full 50 basis points, so I guess where a little worse off than what we were a few weeks ago.
But if you’ve got a variable rate then you have several options for what you’re going to do with your extra cash in the kitty.
1. Pay extra towards your mortgage
The first option is to maintain your mortgage repayments at the higher amount, and by doing so pay extra off the principle of your loan, pay your loan out earlier and reduce the total interest paid on your loan.
For instance, on the average $400,000 mortgage with a 6.70% interest rate, a rate cut of 35 basis points will reduce your monthly repayment amount from $2,751 to $2,663, saving you $88 per month. Continue to pay $2,751 per month and over the full life (ie from day one of the loan, savings will be less the further down the repayment track you are) of the loan you will save around $34,000. You can calculate how much you could be saving on your loan by using an online calculator.
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2. Pay extra towards other debts
If you are struggling with credit card debts, then a better option may be to apply your rate cut to your credit cards in order to pay them off quickly.
Again, by paying more than the minimum monthly repayment on your credit card, you will pay it off sooner and save money on interest. This calculator will help you work out how much you could save by paying extra on your credit card.
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3. Pay it towards your savings goals
Saving for your next holiday just got easier. The third option is to use your rate cut to save extra towards one or more of your savings goals. Maybe you are building your emergency fund? Maybe you are saving to invest? Or renovate the house? Or pay for the car registration?
With the help of compounding interest, increasing your weekly or fortnightly savings will see you reach your goal that much sooner.
More on savings goals: How to save towards multiple savings goals
4. Spend it
Finally, as the rate cut is a response to inflation and a rising cost of living, you may be breathing a sigh of relief – a little extra in the kitty each month to help pay for groceries, bills and other necessities. Or it might provide the means for a little indulgence.
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A rate cut announcement is always good news for the average Australian family with a mortgage. Use your rate cut to get on top of debt, increase your savings or to just help make ends meet.