So this week the Reserve Bank of Australia (RBA) cut interest rates by 25 basis points to new all time lows of 2.00%. Wooohooooo!!!! This is great news for those of us with mortgages. Provided the banks pass on the full cut, it is expected that the 25bp cut would save around $45 per month on a home loan of $300,000. So the big question is what should you do with the extra cash that you will have post the cut?
- Spend it
This is one option and it is certainly what the Reserve Bank (RBA) would like us all to do. The whole reason the RBA are cutting rates to put more money in our pockets so we will spend it. This helps the economy as roughly 70% of the economy is consumption – you and me spending. The more we spend (up to a certain point) the better the economy goes.
- Pay off other debts
If you have other debts that have high interest rates like credit cards or personal loans then it pays to get rid of these debts as fast as you can. Putting the extra money you gain from the interest rate cut onto your credit card could save you 20% or more (depending on your interest rate) on each $1 of debt paid off, a great return!
- Keep your mortgage repayments the same and pay off your mortgage faster
The benefit of doing this is that not only do you pay off your mortgage faster but when interest rates eventually rise you will be protected as you are already paying off a higher rate anyway. In order for this strategy to work you need to be already managing ok with your mortgage repayment at the higher previous level.
- Put the extra into your emergency fund
An emergency fund helps to deal with any bumps in the road that life might bring like losing your job or unexpected expenses. You should aim to have at least six months of expenses saved. Adding to your emergency fund always helps to build that buffer for when the unexpected occurs.
- Consider putting extra money into your superannuation
Lot’s of factors are important when deciding whether add money to your superannuation. Make sure you get some good financial advice, specific to your circumstances.
So of all the options outlined above Mr Money and I have decided to keep our mortgage repayments the same and reduce our mortgage even faster. Actually, we have decided to do this for this cut and the previous one. I guesstimate (using a mortgage calculator ) that just by keeping our repayments the same amount as prior to the last two cuts we cut around 2 years and 11 months off our mortgage and save us around $20,000 in interest over the life of the loan if interest rates stay at this level. Whoooppppeee!!!
What have you decided to do with your mortgage rate cut?
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The information contained in this post is general in nature and does not constitute financial advice. Please see your financial advisor for advice specific to your individual circumstances.