How much could borrowers save on their mortgage when interest rates rise by making additional payments now?

Mortgage borrowers faced with the prospect of higher interest rates could reduce their future repayments by paying more now, with new figures revealing the savings on offer.

Fixed mortgage rates have already started to rise from historic lows as the Reserve Bank unwinds its emergency stimulus measures. While the central bank expects to be patient with any change in the key rate, economists expect a slightly faster increase.

Borrowers have flocked to cheap two- or three-year fixed-rate loans, which let customers pay a higher repayment rate when the term expires, unless they refinance – which it likely will. at a higher cost anyway.

For a borrower who now takes out a loan of $ 500,000, on an average two-year fixed rate of 2.32%, the repayments would be $ 1,929 per month, according to the modeling of the comparison platform Canstar.

After two years, they would be billed a 3.35% return rate and pay $ 2,187 per month.

If the same owner made an additional monthly repayment of $ 150 over the two years, they would reduce their outstanding balance enough to reduce their future monthly repayments by $ 17.

An additional monthly repayment of $ 250 reduces future repayments by $ 28, while the savings are greater for someone who can top up a substantial $ 500 per month now ($ 56 in rebate later) or 1,000. $ per month ($ 113 rebate).

Impact of additional repayments on a two-year fixed loan. Photo: Canstar

“It doesn’t sound that surprising, but it is,” said Steve Mickenbecker, director of financial services at Canstar Group, noting that the economy is for each month for the remaining 28 years of the loan.

“Fifty-six dollars a month doesn’t seem to change a life, but over the life of the loan it makes a big difference. “

Many borrowers have never been in a rising interest rate environment and could be shocked once the liquidity rate rises, he said, but those who have built a reserve may be in danger. able to use withdrawal or netting facilities to help cope with higher repayments later if times get tough.

Without predicting the likely path of future interest rates, the 3.35% rate of return in this assumption might offer a rough guide to the kinds of cheap deals that might be on offer in two years, especially for someone. who plans to repair again, he said. .

Thus, adapting to the additional reimbursements now offers the advantage of reducing costs in the future.

“It’s very similar to what you will be asked to do in two years,” he said. “But doing it now puts you first. “

Many fixed rate loans allow borrowers to make a capped amount of additional repayments, but the limit may vary from lender to lender.

Strong competition has pushed up house prices, but growth may slow down soon.

It comes as bank economists have warned of slowing house price growth as affordability constraints start to kick in, more homes are put up for sale and repayments start to grow higher. Dear.

Westpac on Tuesday warned of the first signs of moderation for housing, with its key Westpac-Melbourne Institute survey showing lower consumer expectations for house prices, albeit still at high levels. Its measure of whether it’s time to buy a home is down sharply from a year ago, signaling low affordability, although up since August.

Westpac predicts Australian house prices will rise another 8% next year and fall 5% in 2023. The CBA expects a 7% increase in 2022, followed by a 10% decline in the year next, while ANZ expects a 6% increase the next year and a 4% drop thereafter.

New borrowers have asked about the prospect of an interest rate hike, said Andrew Kostanski, of Andine Mortgage Brokers.

“I keep telling them, if you look historically, interest rates have never been lower,” he said.

Nonetheless, he is in conversation with clients about their repayments if interest rates rise by three percentage points, in line with the banking regulator’s requirement that banks provide a buffer for future rate hikes.

He said it’s still quite common for buyers to want to borrow their maximum amount, especially first-time home buyers.

“I tell them, don’t forget you still have something to eat,” he said. “Try to have money in the bank when you borrow.

“I always try to dissuade people from this precipice.”

Rob Lees, director of Mortgage Choice Blaxland, Penrith, Glenmore Park, has seen new borrowers choose variable rates as banks have started offering better deals at the same time as they are lifting fixed rates.

Although borrowers worried about rising rates and their eligibility for new rules making it more difficult to get a loan, he said the 3% cushion offered peace of mind.

“With a 3% buffer built in, that alone makes people feel a bit more secure – they know they’ve qualified on a rate that has a 3% buffer built in,” he said. .

Some first-time homebuyers are still running out of steam and want to get pre-approved for their maximum budget, he said.