FALLING interest rates give borrowers a chance to shorten the term of their loan.
This is why I have always recommended that you maintain your current repayments whenever an interest rate cut is announced.
This is why I was surprised to read that a major Australian bank has received adverse publicity in the media for not notifying their borrowers that they had the option of reducing their repayments, now that the rate being charged on their loan had dropped.
The bank should have been commended, not criticised.
Keeping the payments at their present level does more than shorten the term of the loan - it also gives you a safety buffer if rates rise, or you find yourself in a tough financial situation because of unemployment or sickness.
Remember, even though interest rates appear to be in downtrend now, it is a fundamental principle that interest rates move in cycles.
There is no guarantee that interest rates in two years will not be higher than they are today.
A cut of .25% is worth about $5 a week for every $100,000 you owe.
This is just $15 a week on a $300,000 mortgage.
Surely that money is better reducing the principal, rather than going into your pocket, where it is almost certainly going to be frittered away.
Noel Whittaker is a director of Whittaker Macnaught Pty Ltd. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. His email is email@example.com.
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