How to make RBA interest rate decisions work for you and build more wealth

The RBA’s decision to hold interest rates surprised many but rather than sit back and wait, here’s how you can build wealth with this year’s rate cuts so far.

Rising rates hurt households, and today’s reversal offers opportunities. Image: iStock

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Two Reserve Bank interest rate cuts in six months – and the potential for two more this year – have put smiles on the faces of borrowers who battled 13 painful rate rises between May 2022 and November 2023.

Despite the RBA’s surprise decision on Tuesday to keep the cash rate on hold, cuts from February and May are flowing through households and experts still expect a cut in August.

Rather than sit back and enjoy the extra cash, there are strategies that borrowers and investors can use so the cuts create more money for the future.

People who have become used to higher loan repayments and can still balance their household budget have more flexibility to have a big positive impact on their debts and their wealth. Here’s how.

1. Don’t pocket the rate cut

The most popular move has been to simply continue making repayments at the level before the rate cuts, which means more money going off the mortgage debt, reducing interest costs and the life of the loan.

Several banks – including CBA, ANZ and NAB – help this happen by not automatically lowering repayments after rate cuts. Instead, borrowers must contact them and request it to be lowered, and CBA said this week only 10 per cent of customers had done this after the February and May RBA rate cuts.

“The result of keeping repayments at a higher level is that they can get ahead of their mortgage,” says CBA’s general manager home buying, Tess Sutherland.

Research group Canstar estimates the saving from doing this for four rate cuts in 2025 – as forecast by many economists – is $359 a month for a typical $600,000 home loan, shaving four years off a 25-year mortgage and saving $89,133. For a $1m mortgage debt, the saving is $598 a month, $148,522 in interest and also four years.

“At less than $12 extra a day, the potential interest saved makes it worth striving for,” says Canstar data insights director Sally Tindall.

“It also builds an all-important buffer in your loan – one borrowers can potentially fall back on if they hit tough times,” she says.

2. Repay more expensive debt

If you have credit card debt – where interest charges average around 20 per cent – or other personal loans with interest rates higher than your mortgage, it makes financial sense to direct the mortgage rate cut savings to paying off those debts as quickly as possible.

Saving 5 per cent interest on a home loan while paying 10-20 per cent on other loans sends your overall financial position backwards.

3. Invest it elsewhere

Diversification is a key to creating wealth, so some borrowers can consider putting their mortgage savings into growth assets such as shares or other real estate investments.

However, first understand that mortgage interest is paid with your after-tax money – that is, your wage – while investment income and capital gains are taxed, so you will need a decent return to make this strategy stack up financially. With share markets near record highs, this could be tricky.

Two Red Shoes mortgage broker Rebecca Jarrett-Dalton says the combination of rate cuts “could help contribute to an investment property purchase – it could also fund some home improvements to increase the value of your property”.

Mortgage interest savings can be used in many ways. Picture: iStock

4. Move between mortgages

Australia has 2.3 million individual property investors and many have multiple mortgages including their own.

Investment loans are tax-deductible while home loans are not, so it makes sense to maximise tax-deductible debt while minimising personal mortgage debt.

This means diverting all rate cut savings into a home loan or offset account, and making minimum repayments on all investment debts until the home loan is gone.

5. Strategic with super

Want more tax deductions? If it suits your financial situation and time frame, voluntarily injecting rate cut savings into your superannuation account can deliver tax savings now and more tax-free income in retirement.

Canstar’s Tindall says paying extra into the mortgage won’t suit everyone’s financial situation. “Have a conversation with your mortgage broker, your bank, your accountant and think strategically about what works best for your finances,” she says.

Originally published as How to make RBA interest rate decisions work for you and build more wealth