The OCR drops again and congrats if you have made it through the roller coaster that was the past three years. We are more than 3% down from peak pain and now we are rolling into a warm Christmas. But what if your battle scars make you flinch a little, what can you do? Well one thing would be to use nicer times to prepare for what could be around the corner.
Banking 1%
Redirecting a portion of the OCR cuts towards additional home loan repayments can put you on very strong footing. On a $800,000 mortgage, taking 1%, the impact could be a saving of $200,000 in interest (over the full term). If on a 30 year term expect a reduction of around seven years(based on todays rates). That $8,000 additional in repayments every year would come directly off the principle and would help in creating equity faster.
The upside in the short term
It is hard to predict what interest rates will do over the next twenty years so some of this is guess work. However the surprising thing is, that on a $800k home loan, making these additional repayments on top would mean that five years later you would owe $687,000. That additional buffer not only creates a safety margin but speeds up the ability to use equity to buy another property.
Retaining access
Of course you could simply increase your repayments. My regular readers will know that I prefer to use Revolving credits and offset home loans to do this. This allows you to reduce the interest costs but retain the ability to pull back past repayments incase of emergencies.
