Time to read : 4 Minutes

A rate cut!  Sign me up – but I won’t change my repayment amount unless I absolutely have to.  Here’s why…

Why would I keep my repayments the same?

We all know the old saying: ‘short-term pain for long-term gain’. Usually, that’s reserved for things like exercising or eating kale, but nowhere does it apply better than to your mortgage. That’s the magic of compound interest – small changes now can lead to massive savings down the track.

Keeping your current mortgage repayments steady after a rate cut (instead of enjoying slightly lower monthly bills) can help you pay off your home loan years earlier. Sounds like a win, right? Let’s crunch some numbers.

The savings breakdown

I ran the numbers, and the results are eye-opening, based on two potential rate-cut scenarios: two cuts and four cuts (of 0.25% each). Let’s see what that means for your wallet.

If you have a $500,000 mortgage

If interest rates drop four times, your monthly repayments could shrink by $300. Tempting, right? But if you resist the urge to pocket that extra cash and keep paying the same amount as before, you could save a whopping $74,000 over the life of your home loan and pay it off in 21 years instead of 25. I’ll cover two rate cuts a little later on.  

If you have a $1 million loan 

Let’s be real – if your home loan is for a property in a major Aussie city, a $1 million loan is probably closer to reality. Here’s where things really get juicy.

Two rate cuts could mean an extra $303 in your pocket each month. But if you stay the course and keep making the same repayments, you’re looking at a cool $96,000 in savings and a fully paid-off home two years and three months earlier.

With four rate cuts, the choice is between saving $597 a month in the short term or an incredible $148,000 over the life of your loan. Oh, and you’d be mortgage-free four years ahead of schedule. Let that sink in.

Short-term pain. Long-term gain

Of course, not everyone has the luxury of keeping repayments the same. The cost-of-living crisis means plenty of families are already scraping by, and any extra breathing room in your budget might just be a giant exhale – which is totally fine.

Yes, but... if you can afford it, putting some of that extra money towards your principal instead of spending it on more Uber Eats could be a game-changer.

For example, if you have a $500,000 loan with a 25-year term at an interest rate of 6.33%, two rate cuts could lower your repayments by $151 a month. Sounds nice, but if you ignore your rate cut and keep making your original repayment, you’d be $48,000 better off over the full loan term. You would also finish paying it off two years and three months earlier.

It’s up to the banks now

One thing to keep in mind is that there are no guarantees banks will follow the RBA. Compare Club’s Head of Home Loans Anton Stevens explains. 

“While the RBA has cut the cash rate, it’s up to banks whether they’ll pass on the cut and at what percentage. Some banks may not reduce existing variable rate home loans down by the same rate as the RBA.”

Don’t wait for the RBA

Rate cuts are great, but there’s no need to sit around twiddling your thumbs while you wait for the RBA to make a move. There are plenty of ways to get ahead on your mortgage right now. 

Here are my top four tips: 

1. Call your bank and haggle

You don’t need to wait for the RBA. Pick up the phone and ask your bank for a better deal. 

You’d be surprised how often lenders will throw you a rate cut just to keep your business. And if they don’t budge, it’s time to shop around and refinance with a lender who will. An experienced mortgage broker can help you there.

2. Review your bills

Your mortgage isn’t the only bill you can negotiate. Put some time in on the weekend to review your electricity, gas, internet, and even mobile phone plan. Then, take your savings and chuck it straight into your mortgage – better still, add it into your offset if you have one. An extra $50 a month can add up to thousands over time.

3. Switch to fortnightly repayments

A simple but effective trick: instead of paying your mortgage monthly, switch to fortnightly. Some banks just divide your monthly repayment in half, which won’t change much because you’re not actually paying in any more money to your loan. 

Why is switching to fortnightly good for your bank balance?

• In a four-week month, fortnightly repayments cost you less than monthly repayments, so this helps with your cash flow (even in longer months). Little and often can be easier to manage than a big lump sum each month.

• There’s more fortnights in a year than there are months (weird, but true). This means you’ll pay off more in 26 weeks than you will in 12 months, so you can get debt-free faster.

For example: on a $600,000 25-year principal and interest loan at 6.28%, you’d be paying $3,970 a month. Switch to paying every two weeks and that becomes $1,985. 

Over the lifetime of your home loan – if your interest rate remains the same (which it won’t) – you’d be paying $112,892 less in interest to your bank.

4. Consider fixed rates

While another cut could be on the cards, the good news is banks have started reducing fixed rates and there are some very attractive rates if home loan holders are considering refinance options.

“It’s rare that fixed interest rates dip below variable ones. Currently on our panel we have fixed rates below 5.55%. That’s lower than we’ve seen in a couple of years,” said Anton. 

Bottom line

When the RBA cuts rates, you have two choices: enjoy the short-term relief of lower repayments or stay the course and save big in the long run. If you can afford it, keeping your repayments steady is one of the simplest ways to knock years off your mortgage and save tens (or even hundreds) of thousands of dollars.

So next time you hear about a rate cut, take a moment to celebrate – then pretend it never happened if you’re able. Your future self (and your bank balance) will thank you.

Go deeper: 

• Can an offset account help you break up with your bank faster?

• Why are home buyers choosing to borrow from non-bank lenders?

Financial disclaimer

The information contained on this web page is of general nature only and has been prepared without taking into consideration your objectives, needs and financial situation. You should check with a financial professional before making any decisions. Any opinions expressed within an article are those of the author and do not specifically reflect the views of Compare Club Australia Pty Ltd.