Borrowers can save big with same repayments after a rate cut

Aussies can save thousands of dollars by ignoring a rate cut by the RBA. Here’s why.

Savings are there to be made in the suburbs. Picture: Supplied

IF and when the RBA finally cuts the cash rate, I will be leaving my own rates on hold.

Why? Because it will save me tens of thousands of dollars and years of mortgage payments.

You may have heard of the saying ‘short term pain for long term gain’. It’s used across all walks of life, but nowhere is the long term gain greater than when it relates to your mortgage.

That’s the magic of compound interest.

Even a small tweak like continuing to make the same loan repayments you are making now, rather than paying less each month after a rate cut, can mean you pay off your home years earlier.

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I asked Canstar to crunch the numbers to find out exactly how much Aussies could save. Canstar calculated savings for two rate cuts and four rate cuts, based on no banks predicting just one or three rate cuts in this cycle.

Tim McIntyre plans to keep his own rates on hold, even in the event of an RBA cut. Picture by Max Mason-Hubers

On a $500k loan

If you had a $500,000 home loan with a 25 year term and were paying 6.33 per cent in interest, two rate cuts would save you $151 a month if you reduced your repayments in line with interest rate cuts of 0.25 per cent each. However, if you maintained your current payments, you would be $48,000 better off over the full term of your loan. You would also pay it off two years and three months earlier.

In the event of four rate cuts, lower repayments would save you $300 a month. But maintain current repayments and you save $74,000 over the life of the loan and pay off your home in 21 years instead of 25.

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Canstar Data Insights director Sally Tindall.

On a $1m loan

A $1 million loan is probably more realistic for Aussies in 2025 and beyond, especially in capital cities. Here’s where the savings can really start to make a difference.

Based on the same loan term and starting interest rate, two rate cuts could see you save $303 a month.

Keep the repayments the same, however, and you will save $96,000 over the life of the loan and again pay your home off two years and three months earlier.

On four rate cuts, you could choose between the significant short term relief of $597 per month, or the long term gain of $148,000 in savings and being mortgage free four years earlier.

Short term pain

Canstar data director Sally Tindall said many families “would not have a single ounce of fat in their budget thanks to the cost of living crisis”, so may not be able to keep their monthly repayments the same in the event of a rate cut.

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But those who can will be paying principal down off their debt instead of interest.

“Essentially, what you’ll be doing is making extra repayments,” Tindall said. “This will help reduce the amount of interest you’re charged each day and help you build a buffer in your mortgage that can also act as an emergency fund.

“The savings from making extra repayments can easily run into the tens of thousands of dollars over the life of a mortgage. In some cases, they can lead to savings of over $100,000, particularly on a decent sized loan.”

Don’t wait for the RBA to make a move. Picture: NCA NewsWire / Martin Ollman

Don’t wait for the RBA

Tindall said that keeping monthly repayments the same was just one of a number of different ways to knock debt off your mortgage.

“There’s other relatively low hanging fruit you can grab at to accelerate these savings even further,” she said.

“Before the RBA makes a move, ask your bank for a rate cut or consider refinancing your mortgage to a lender willing to offer you a lower rate.”

Trim unnecessary bill spend

“The mortgage isn’t the only bill that’s negotiable. Take a few of hours out of your day to renegotiate your other bills such as your electricity, gas, home internet, even your mobile phone plan,” Tindall said. “Calculate how much you’ll be saving each month from switching providers and set up an automatic transfer into your mortgage for that amount, whether that’s straight into your loan as extra repayments or into an offset account.

Go fortnightly

“Another popular trick is to switch to fortnightly repayments, instead of paying monthly,” she said.

Lenders may have different calculations for fortnightly repayments.

“If your bank takes your monthly repayments and divides them in two to get the fortnightly amount, then you will essentially end up paying two extra fortnights over the course of every year, potentially saving thousands.

“However, many lenders calculate fortnightly repayments by multiplying the monthly repayment by 12 and then dividing it 26, which won’t see customers paying more each year. That said, you will still see a small savings. Banks calculate interest charges daily, so customers that are paying part of their monthly mortgage repayment two and a bit weeks early each month, will still see a small savings over the longer term.”

Originally published as Borrowers can save big with same repayments after a rate cut