Australia’s banks are required to test how you would cope with an interest rate increase. They do this by adding approximately 3.00% p.a. to the current rate.
Here is what this calculation would look like for someone with a $450,000 variable rate mortgage:
@ 4.25% p.a. the monthly repayment is $2,214 over 30 years.
@ 7.25% p.a. the monthly repayment is $3,070 over 30 years.
The additional cost of a monthly repayment based on 7.25% p.a. compared to 4.25% p.a. is $856.
If you were to add this $856 to your monthly repayments (pay $3,070 per month), the result would be amazing (see below).
As you can see, If you make repayments at the bank buffer interest rate, you could save yourself $161,055 in interest expense and pay off your mortgage approximately 12 years and 8 months early.
NOTE: This calculation is made on the assumption that the variable rate will stay at 4.25% p.a., which it will not, however, the effect of making additional repayments is always beneficial to the overall interest bill.
Our main message here is that if you can afford to make repayments at the 3% buffer rate, you should do it, especially when rates are at such historically low levels.
Give me a call if you need any help with this strategy. The tools/calculators that you need to make your own calculations are also on Smartline’s website.
If the bank thinks you can do it then why not give it a go.
Cheers, Ben 0488 510 123