Borrowers smash down mortgage debt by making extra repayments

Mortgage customers are scaling ahead of their repayments and just how far they are ahead may surprise you.

Mortgage customers are maximising low interest rates and many are more than three years ahead of their scheduled repayments, new analysis has found.

Some interest rate deals have fallen into the “2” per cent range, enabling borrowers to pay down their debt faster than ever before and build up record buffers.

Data from the nation’s biggest financial institution, the Commonwealth Bank, found customers are on average 37 months ahead of their scheduled repayments — this is a huge increase from 2011 when customers were an average of just eight months.

In 2011 the Reserve Bank of Australia board began its downward cycle of rate cuts from 4.75 per cent.

National Australia Bank data showed customers are on average 38 months ahead — this amount includes cash held in customers’ mortgage offset accounts.

While one in five Westpac customers are more than 21 months ahead and half of all ANZ owner occupiers paying principal and interest are at least three months ahead.

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Bank customers are months ahead in their mortgage repayments. Picture: iStock

Home Loan Experts’ managing director Otto Dargan urged borrowers to pour as much money into their home loans as possible now while rates are low.

“Homeowners should take this opportunity to increase the size of their repayments if possible,” he said.

“On a $500,000 30-year home loan if they paid $300 per month more than their old repayments they would save 6.7 years off their loan term and $101,200 in interest.”

The RBA board meets again on Tuesday and its expected they will drop the cash rate to 1 per cent after just dropping it last month.

CommSec senior economist Ryan Felsman said borrowers had become more debt conscious and many remained focused on “paying down debt”.

This prevented them from spending which is what the RBA board hoped cash rate cuts will do to stimulate the economy.

Financial experts are expecting the Reserve Bank of Australia board to cut the cash rate in July to 1 per cent.

“Households are remaining quite cautious and paying down debt,” Mr Felsman said.

“But the downside of interest rate cuts is that term deposits are at near 50-year lows.

“That discourages people from putting the money in the bank, instead they are preferring to pay down the mortgage.”

Financial comparison website Mozo’s spokeswoman Kirsty Lamont said if the RBA did cut the cash rate next week borrowers should not count on lenders passing it on in full.

“I’d be very surprised if we see the big four banks pass on another rate cut in full,” she said.

“Already we’ve had the situation where two of the big four banks held back some of the June rate cut.” 

Meanwhile for investors they have enjoyed the Australian sharemarket this month reaching 11.5 year highs.

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Originally published as Borrowers smash down mortgage debt by making extra repayments