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Why Aussie households are years ahead of their home loan repayments

By ,| 3 min read

The COVID-19 pandemic’s numerous lockdowns has influenced a savings surge resulting in Australian homeowners being almost four years ahead of their home loan repayments.

According to data released from the Australian Prudential Regulation Authority (APRA), over the past two years a record $50 billion has been added to offset accounts.

The average borrower is now 45 months ahead of their principal and interest mortgage repayments, increasing from 32 months at the onset of the pandemic. Borrowers with interest only home loans are now on average 52 months ahead of repayments.

Additionally, offset account balances have increased by over $20,000, from $77,000 to $97,500 in this time.

In this article we’ll explain how the pandemic has influenced the savings surge, how an offset account can reduce interest charges and the benefits of being ahead of your mortgage repayments.

What has caused this savings boom?

Despite the pandemic causing intense economic pressure and uncertainty, it has generally influenced positive savings habits across the population.

Low interest rates, strong governmental support and forced savings have resulted in Aussie homeowners racing ahead of their repayments.

Most households have been spending less now than they were prior to the pandemic. This makes sense – if you’re stuck at home during a lockdown, you’re naturally going to be spending less on outings, holidays and other expenses.

The uncertainty seen at the start of the pandemic may have also fuelled smarter saving decisions among homeowners. If you were unsure about whether your employment could be affected, the safest thing to do was to build up your savings.

And, if you have significant savings, why not reduce the amount of home loan interest you’re charged by putting these funds into an offset account?

Low home loan interest rates

The impact of record low rates is not to be understated either. Early in the pandemic, interest rates dropped to historical lows, encouraged by the Reserve Bank of Australia (RBA) slashing the official cash rate.

Lower interest rates result in lower minimum repayments, meaning that borrowers can afford to:

  • Increase their monthly repayment amount
  • Make extra repayments
  • Put these interest savings into an offset account.

How an offset account could help you save thousands of dollars on your mortgage

An offset account functions like a transactional everyday savings account linked to your home loan balance.

Any funds you keep in this account offset the interest that is charged on top of your loan.

For example, if you have an $800,000 home loan balance to repay, but you have $100,000 in your offset account, interest will only be charged on the first $700,000 of your home loan.

Let’s look at how much you could save on your monthly repayments with $100,000 in your offset account:

Home loan balanceOffset balanceLoan termInterest rateMonthly repayment amount
$800,000$030 years2.5%$3,161
$800,000$100,00030 years2.5%$2,766

Under this home loan example, you’d pay approximately $395 less each month. This adds up to close to $5,000 in savings in just a year.

You could put these savings towards making extra repayments on your home loan, new investments, lifestyle expenses, or even further building up your offset balance.

How much can you save with an offset account?

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What are the benefits of being ahead on your home loan repayments?

Being ahead of your mortgage repayments is great news for any borrower. Here are some of the benefits:

  1. You have a protective buffer against future interest rate rises, which are likely to occur over the next couple of years. This buffer could also help protect you if you experience future financial difficulties that inhibit your ability to make regular repayments
  2. The faster you pay off your mortgage, the less you’ll pay in home loan interest
  3. If you’re ahead, you’ve built up more equity. Property prices have boomed at the same time homeowners have been building equity. This extra equity means there’s a huge opportunity to access cash out to renovate or extend your home
  4. Being ahead of your repayments means you are closer to being free from debt.

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What if you have a fixed rate home loan?

If you have a fixed rate home loan, you may be aware of the limitations you face with your loan.

While having a loan with a fixed interest rate brings stability to your life and budget, it won’t be as flexible as a variable rate home loan.

You typically won’t be able to make unlimited extra repayments and making adjustments to your loan terms and structure can be more complicated. Most lenders don’t allow 100% offset accounts for fixed rate borrowers either.

Plus, if you do end up making extra repayments or refinancing your loan before the fixed period is over, you could face break costs.

If you’re curious about whether you could be getting ahead of your repayments, or finding ways to save on home loan interest, it may be time to get in touch with a Home Loan Specialist. Our experts can tell you more about your home loan options and how to save so you can avoid the FOMO.

What could your home loan repayments look like?

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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.

Tags: home loan, equity, home equity, offset account, fixed rate home loans, variable interest, saving

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