Borrowers advised to pay down debts

7th June 2010

Households with mortgages have been advised to take advantage of the pause in interest rate rises and pay down their debts.

This follows analysis by financial comparison website RateCity of Australian Bureau of Statistics data which has found that the value of home loans has been falling since September 2009. This decline predates the start of the Reserve Bank’s rate rises, which have seen the cash rate rise from 3.0% to 4.5%.

The total value of total home loans in March was $13.5 billion (seasonally adjusted) and has not been this low since November 2008 when the average standard variable rate was 7.34% - 31 basis points higher than the current average of 7.03%.

The number of mortgage commitments has dropped by 14,628 since March 2009 - with 48,260 home loans recorded by the ABS in March 2010.

RateCity’s CEO Damian Smith says borrowers should use this period to pay down debts while interest rates have eased.

“A further 25 basis point increase would have meant additional repayments of about $48 per month for a $300,000 loan and about $96 per month for a $600,000 loan,” Smith says. “So it’s a great time to make the most of the break and pay down your debts as much as you can.”

Smith suggests that borrowers could save $24,000 in interest and reduce the 25-year term by a year by adding $50 to their monthly repayments (based on a $300,000 loan at the current average standard variable rate of 7.03%).

“Paying down debts is the best financial option for most Australians because they benefit from not being directly taxed on the interest they save compared to putting their money in a savings or term deposit account and being taxed by their marginal rate on the interest earned,” he says.

Smith also suggests it’s a good time for borrowers to compare the interest rates of their lenders or credit card providers with those offered elsewhere in the market. “The difference between the rates charged by various lenders is much larger than any single interest rate rise from the Reserve Bank – so there’s more to be gained from shopping around than by any single Reserve Bank decision,” he says.

ENDS