Rather than borrowing more, the smart money is banking (not spending) the difference between current interest rates, and what they’ll likely move to at some point.
In Australia, we’ve now surpassed a record 10 years without an official rate rise, but we’ve not necessarily been taking advantage of the free ride. It’s unlikely they’ll move below the 1.5% official rate we’ve now had since August 2016, and yet current estimates show that up to 30% of households could statistically be under mortgage stress.
The New Year is as good a time as any to rejig finances to take advantage going forward, and at the same time create buffers for any challenges that we may face down the track.
Let’s assume the average interest rate on a $500,000 mortgage is 4%, but a long term reasonable estimate of interest rates is say 7%. Minimum repayments at 4% would be around $2,400 a month. However if we mentally shift to a 7% environment, and pay $3,325 per month instead, the 30 year loan would be paid off in 18 years, and $163,000 in interest would be saved. The best way to do this is to either increase monthly repayments that sit in the redraw facility, or establish multiple offset accounts that allow automated savings to sit alongside the loan.
This additional savings discipline also dramatically assists any future loan application for an upgrade strategy, creates an ideal safety net for any number of unforeseen events, and allows us to reduce the dependency we have on life insurance that steadily increases in costs as we age.