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