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More than two-thirds of borrowers intend to maintain their current repayment amounts even as interest rates drop.
New research from non-major bank ING Australia (ING) has found that the vast majority of Australian borrowers will maintain their current repayments despite potential rate reductions coming from the lenders.
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In a survey of 750 Australian mortgage holders conducted online between 12 and 16 February (before the Reserve Bank of Australia’s decision to reduce rates), variable rate borrowers were asked what they would do with the extra funds from potential interest rate reductions.
According to the data, 68 per cent of Australian mortgage holders plan to maintain their current repayment amounts even if their home loan rate drops, rather than decreasing them.
Among the respondents who said they would be likely to keep paying off their mortgage at the same rate, more than half (56 per cent) said they would be doing so to pay down their principal faster, while 43 per cent said they would push the extra money saved from reduced rates into an offset account.
Speaking to The Adviser about the findings, Matt Bowen, ING’s head of consumer and market insights, said: “The ING research suggests that 7/10 Aussie mortgage holders will keep their repayments at the same level they’re currently paying, which means that they will be paying more than the new minimum repayment amounts (assuming a cut). This is a very financially responsible strategy.
“On an average $600,00 mortgage, a 0.25 per cent reduction in interest rates is the equivalent of $100 per month.
“If you were to pay this amount above the minimum repayment it could save you thousands of dollars in interest over the life of the loan and shave off up to two years.”
Bowen said that borrowers may be choosing to maintain their repayments as a result of cooling inflation, a raft of cost-of-living measures implemented by the federal government (such as Stage 3 tax cuts and energy relief), and wage growth, which may have helped relieve household budgets and improved overall discretionary income.
“As a result, many Aussies will be feeling more comfortable with the current interest rate settings and repayment rates, albeit the highest they’ve been for many years,” he said.
He said that few borrowers would look to increase their repayments given the “record high interest rates for 15 months”, which he said “has put strain on household budgets”.
What would borrowers change their repayments for?
Just under a third (32 per cent) said they would adjust their repayments as rates fall, with a similar proportion hoping to save the money.
Of those intending to save the difference in repayments, 73 per cent said they would do so to build their “emergency savings” balances, while 54 per cent said they would put it towards travel/holidays and 19 per cent said the money would go towards their child/children’s education.
Around 12 per cent expect to use any money saved on repayments to pay down other personal debt. For example, 68 per cent said they would pay down their credit card, 44 per cent would pay down their personal loan, and 28 per cent would put the funds towards their car loan.
Five per cent said they make voluntary contributions to their superannuation account. When extrapolated across the adult Australian population, this is the equivalent of 242,000 Aussies in total. Around 78 per cent of these said they would make regular ongoing contributions.
Only a small proportion of Australian mortgagors said they would spend the money saved on repayments from any potential rate reductions. Of this, 13 per cent plan to invest it (over half of Aussie mortgage holders will be putting it towards shares (54 per cent) or exchange-traded funds (ETFs, at 53 per cent).
Just 3 per cent intend to “splurge” the money – mostly on personal shopping (such as clothing, skincare, and accessories), education (including tertiary studies), hobbies, and entertainment.
[Related: Bank reveals which rates would trigger ‘considerable’ home buying]
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