A home loan broker is warning households that the substantial savings seen on mortgage repayments in the past year could be quickly reversed once the economy recovers from recession.
The Reserve Bank of Australia is expected to keep its cash rate unchanged at a 49-year low of 3.0 per cent at Tuesday's monthly board meeting, having cut 425 basis points off the rate since September.
Economists believe the central bank will make further minor cuts over the rest of the year, with Wednesday's national accounts expected to confirm the economy is in recession.
But Loan Market Group executive director John Kolenda says home owners should be budgeting for rates to rise again quickly when the economy turns around.
"There's every possibility the dramatic rate cuts by the RBA of up to one per cent a month we saw late last year and early this year could be reciprocated with similar types of rate rises,'' Mr Kolenda said.
He a said a mortgage holder with a $300,000 variable home loan would be saving $700 a month on their home loan repayment compared to a year ago.
"While it is very tempting to be using those savings now to boost the household's spending power, people repaying home loans are better off paying as much as they possibly can in mortgage repayments,'' he said.
"Paying just another $100 a month more than you are required can substantially reduce your total repayment and take years off the time needed to repay your loan.''
He said it was far more financially beneficial to do this rather than being more cashed up in the short term.
"It will also prepare you for the inevitable increase in rates,'' he said.
"When interest rates do start to rise again, for every 1 per cent increase it will equate to around $200 a month extra in repayments.''
AAP
