Investors warned about wasting ‘rate cut savings’
Cuts to the official cash rate throughout 2012 and 2013 have reduced the ‘typical borrower’s' mortgage repayments by $262 per month, but investors have been cautioned about mismanaging the extra cash.
Alex Parsons, CEO of RateCity.com.au, said even though it’s tempting to spend the additional savings, putting the extra money back into your mortgage is generally the most effective option.
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“If you are paying an average rate of six per cent interest on your mortgage over time and you’re an average taxpayer, you would have to find a financial investment with a greater than 10 per cent rate of return elsewhere to be better off – that’s a tough gig in the current market,” he said.
“If you leave the extra money on the mortgage, it comes straight off the principal and it pays off your mortgage faster.”
Paying more than the minimum repayments on your mortgage will cut the amount you owe, shorten the life of your loan, and potentially save borrowers tens of thousands of dollars in the process, Mr Parsons said.
RateCity also recommended investors pay down any non-tax-deductable debts, such as credit cards, as soon as possible.
“If you have credit card debt or other debts accruing a higher interest than your home loan, consider using the money you are saving on your mortgage to pay off that debt. With the average interest rate on credit cards at 17 per cent, credit card debt is one of the most expensive debts to carry,” Mr Parsons said.
