Try This Simple Strategy – Dollar Cost Averaging Your Mortgage

Dollar cost averaging (DCA) is an investment technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price.

Do you consider your home loan on ‘special’ when it is a low rate?


Stock market investors use Dollar Cost Averaging as a way to buy a set amount of shares each month. Instead of buying a predetermined number of shares, eg 50 shares, they will spend a predetermined amount of dollars eg $1200. No matter what the share price is they will buy $1200 of that particular share, and not be concerned about the number of shares that is being purchased.

DCA is a term that many share market investors would be familiar with. Not as many property investors would frequently use this term to describe aspects of property investing.

Dollar Cost Averaging is used in our household many times in a month; not when buying property, but when grocery shopping. Pretty funny hey…

I actually use DCA when shopping for specific items, (with 4 kids you do lots of shopping!) for example a bottle of sweet chilli sauce. Let’s say this sauce costs $4 per bottle and we normally buy two bottles.

Strolling down the sauce isle, and our favorite sweet chilli is on sale today, yay for me!  Instead of $4.00 each, it is 1/3 (33%) off, or $2.68 each bottle. At this point, there is two choices I could make:

  • Buy the 2 bottles we need, and instead of costing $8 it will only set me back $5.36.
    • A saving of $2.64 or 33%.
  • Buy $8 worth of sweet chilli sauce, meaning I buy 3 bottles for $8.
    • Acquire 50% more sauce for the same money I usually spend

The same figures either give me a 33% saving or a 50% increase in acquisition. Interesting.

What does sweet chilli sauce have to do with real property?

Unlike shares in the same company, or bottles of sweet chilli sauce, each property is unique. Most people don’t buy property each week either, so dollar cost averaging on property purchases is a non-event; it’s completely pointless.

Something that you do purchase daily or weekly for your property is the interest rate on your loan. You can’t shop around weekly for new interest rates on your money but you can use a long-term average interest rate pricing as your benchmark.

Over the past 30 years the long term interest rate in Australia has averaged out at 7.5% – 8.0%, depending on whose report you are reading.

If you are currently paying 5%, you are well under the long-term average and like my sweet chilli sauce, it triggers a ‘buy’. (Coincidentally the banks currently use a figure of 7.5% – 8% for their loan ‘assessment rate’. This is the rate they use in their calculations to determine your serviceability to pay for a new loan.)

As the definition at the top says, Dollar Cost Averaging is the process of buying a fixed dollar amount regardless of the cost. This translates to ‘buying’ your interest rate at a set level no matter what the current cost.

This is how to Dollar Cost Average your home loan:

If you work your repayments out based on the long term interest rate (say 7.5%) and not your current rate (5%), you will currently be paying more each month than the bank requires.

In essence, you are getting your ‘money’ (via the interest rate) cheaper than normal (like my discounted sauce) so in effect are getting more money for your money. Actually, you are reducing more debt for your standard repayment.

If we translate that to your home loan it would look like this.

Home Loan – $500,000
Current interest rate – 5%
Current principal and interest repayment – $2922.95              Bank only requires this amount

Long term interest rate – 7.5%
Repayment using long term interest rate – $3694.96              Amount you choose to pay

Buffer each month you are creating – $772.01

Clearly this figure will put you ahead of your repayment schedule, meaning you will pay off your home sooner. However it also means that when interest rates move to 5.5%, 6.5% or even 7.5%, your repayment does not change and neither does your lifestyle!

What if rates move above 7.5%?

Good Question; it will depend on the length of time you have been Dollar Cost Averaging your mortgage and the amount of buffer you have amassed. A discussion with your broker or bank will define how your loan account is structured.

Some lenders will allow your buffer to be used as part repayment. If you have $10,000 in buffer and your repayment has increased $200 above what you have been depositing, then $200 will be reduced from the buffer amount, slowing reducing the buffer.

This is the whole purpose of Dollar Cost Averaging your mortgage. It is designed to even out the humps and dips in the interest rates and providing you a defined structure in which to work your finances and buy more debt repayment when the money is cheaper.

Who doesn’t want a bargain each time you pay money off your mortgage? …

Why don’t you do some calculations in your own household and see if you can make Dollar Cost Averaging work for your mortgage? It might be a stretch or even a sacrifice, but the ability for you to reduce your debt and to buy money when it is cheap, should not go unconsidered.Scott Northcott Australian Property Advisor

For more information on this article or anything property related, contact us via 1300 66 77 89 or via email here.

Since 2004 Scott Northcott has been helping people buy the best properties for their needs at prices that simply speak for themselves.
Scott has been instrumental in bridging the gap between financial planning and traditional real estate transactions through his property advice model. By carefully considering his clients’ goals and planning for market changes via demographics and trends, Scott designs a future proof outcome not only specific to the client’s needs but dynamic in its execution with performance indicators and exit strategies built in.