Borrowers warned: Add money to mortgage or miss out on rate cuts

by AB31 May 2013

Mortgage holders with money in savings accounts would be far better off putting the extra money into their home loan, according to financial comparison site, RateCity.

The site claims borrowers with a standard $300,000 mortgage, earning $70,000 and saving $300 per month – the amount of extra money saved each month from lower interest rates since November, 2011 – would need a savings account with a rate of over 7.09% to be better off than adding the savings to their home loan.

If the borrower earns more than $80,000, they would need a rate of more than 9.11% to be better off.

According to RateCity, savings accounts have fallen more sharply than home loans, with savings accounts dropping by 177 basis points, while standard variable rates have fallen by 156 basis points, on average, since the RBA began cutting the cash rate in November 2011. The average savings account rate is now 3.27%.

This month, 14 financial institutions cut savings accounts by more than the RBA's 25 basis points, while eight lenders have cut standard variable rates by more than 25 basis points.

Michelle Hutchison, spokesperson for RateCity, says variable borrowers have more money in the bank from rate cuts and most would be better off to add their savings to their mortgage.

"If you save $300 per month in an average savings account, you're essentially missing out on over $80,000 over the loan term by not adding it to your mortgage. This is because you are taxed on the interest you earn from your savings but if you leave your savings in your mortgage, you save on interest charged and don't pay tax on the interest you save.”

"There's no point using a savings account if you have a mortgage and your home loan offers a free 100% offset account or redraw facility. The money you save on interest charges by leaving your savings in your home loan account far outweighs the interest earned in any savings account currently on the market.”