AMP Bank has recorded a 14 per cent increase in the number of existing home loan customers switching from interest-only to principal and interest loans since the first round of rate cuts in June.

Analysis of customer data has revealed more existing interest-only customers are choosing to pay down their debt as interest rates have decreased, switching from interest-only loans ahead of their five-year expiry date.

If a homeowner with an average 30-year $400,000 home loan (first five years interest-only and remaining 25 years principal and interest) were to switch to paying principal and interest two years earlier, it would initially cost an extra $517 per month.

However, they would save $14,711 over the life of their loan as a result of starting to pay down their debt earlier.

AMP Bank Chief Executive Sally Bruce said: “The recent rate cuts have put more money in the pockets of homeowners, and we are seeing a significant uptick in the number of those customers opting to pay down their debt with the extra funds that they have.

“Whilst interest rates are at record lows there is no better time to pay down debt to own your home or investment property sooner. Homeowners are sometimes unaware of how powerful extra repayments can be – those who are able to increase their repayments now will pay less interest over the life of their loans.”

Average interest-only home loan rates are currently 50 basis points higher than principal and interest rates for owner-occupiers, according to the latest Reserve Bank of Australia lending rates data for June.

Ms Bruce said: “Switching to principal and interest will cost homeowners more in the short term, but over time the customer could save thousands of dollars in interest as a result of paying off their debt sooner.

“These decisions always come down to a customer’s personal circumstances and capacity in their budget, but if their situation allows it, the short-term pain may be worth the long-term gain.”

Additional calculations:

• If a homeowner with a 30-year $700,000 home loan (first five years interest-only and remaining 25 years principal and interest) were to switch to paying principal and interest two years earlier, it would initially cost an extra $904 per month. However, over the life of their loan, they would save $25,7441 as a result of starting to pay down their debt earlier.

• If a homeowner with a 30-year $1,000,000 home loan (first five years interest-only and remaining 25 years principal and interest) were to switch to paying principal and interest two years earlier, it would initially cost an extra $1,291 per month. However, over the life of their loan, they would save $36,777 as a result of starting to pay down their debt earlier.

Notes:

• The above calculations are based on RBA lending rates data for June 2019 – securitised housing loans, average outstanding variable rate owner-occupier principal and interest: 4.04% p.a. and securitised housing loans, average outstanding variable rate owner-occupier interest only: 4.54% p.a.  The calculation is a model only and does not account for future variations in interest rates or include fees.

• AMP Bank compared customer movements six weeks prior to the first RBA rate cut in June and six weeks after.

The information should be used as a guide only.

Individuals should consider their personal circumstances and seek professional advice where appropriate.