Earlier this month the Reserve Bank cut rates again – the third time since June – to a new all-time low of 0.75% as they attempt to stimulate the economy.
Media has reported the big banks only passed on an average 0.57% of the 0.75% in savings to customers, however one major bank cut rates for interest only investment loans by 0.80%; 0.05% more than the official cuts.
With interest savings many home borrowers have decided to keep monthly repayments the same, using the extra payments to get ahead rather than spending them.
If you are one of those people getting ahead you will have noticed more available redraw on your statement.
Many rely on this money as back up for a rainy day, or to use for some other purpose – How would you feel if you went to draw on that money and it wasn’t there?
This can happen when you ask your lender to reduce monthly repayments to the minimum amount. Often borrowers don’t fully understand the consequences of this request, and lenders may not clearly communicate the impact.
Say you are $10,000 ahead on your loan repayments, with these funds shown as available redraw. You call the bank, and ask them to reduce your repayments to the minimum amount.
In doing this, the bank first clears any redraw (which reduces your available loan balance), then recalculates the lower repayments over the remaining loan term.
Many don’t realise what has happened until it is too late –trying to draw on funds to realise they are no longer there! Often this can’t be reversed either.
Mark’s Shout: Before you make changes to your home loan repayments, speak with your broker or lender about what your bank’s policy is on redraw so you aren’t caught out. See you next week!