Extra cash in your pocket after the Reserve Bank cut the interest rate

MANY patient borrowers have seen their variable home loan drop but now they need to work out what to do with the additional money.

PATIENT borrowers who have received a drop in their variable home loan interest rate should take some time to think about what to do with that extra money.

Some lenders weren’t generous enough to pass on the latest 25 basis point rate cut in full, however most banking customers say they will notice a drop in the amount of interest they are paying.

On a $300,000 30-year home loan the cut will push the average variable home loan rate down to 4.4 per cent and save borrowers about $44 per month.

We’ve asked the experts what mortgage customers should do with this excess cash.

Keep your home loan repayments the same

MoneySmart’s senior executive leader for financial literacy Miles Larbey says if you are already used to making your repayments at a certain level, don’t change them.

“Maintain your repayments at the current level rather than reduce them,’’ he says.

“If you keep them there then over the life of the mortgage you will save many months and thousands of dollars in interest over the loan term.

“So, if you can afford it, don’t change your repayments.”

Most banking customers say they will notice a drop in the amount of interest they are paying.

Increase your mortgage repayments

Hillross financial adviser Lee Virgin says tipping extra money into the mortgage is one of the best thing borrowers can do while many interest rates are as low as in the three per cent range.

“Pump the extra money into your mortgage either off the loan, into a redraw facility or otherwise into an offset account,’’ he says.

“Whatever is built up in there will be a good buffer for when interest rates eventually do rise.”

If you are already paying more than the minimum amount each month it’s likely your lender will keep your repayments at the same level which will help you get further ahead on your loan.

Pump extra money into your mortgage, either off the loan or into a redraw facility.

Pay off debt

Virgin says anyone who has a hefty credit card debt that is attracting a high interest rate — many cards are around the 20 per cent mark — should divert extra funds here.

“The interest rates on these cards are flaming nasty, so the obvious thing to do is to pay the card off with the highest interest rate first,’’ he says.

“This is the perfect opportunity for borrowers to go really hard on that interest rate bill on credit cards.”

Save it

Christmas is only seven months away and Larbey suggests tucking away the extra cash to spend once the festive season arrives.

“Save the extra money between now and Christmas, if it’s $50 per month that’s $250 come Christmas time,’’ he says.

“Have some money in the bank to avoid that very significant additional spend that many of us have at Christmas time, put it away into a separate account now and start that Christmas savings plan.”