It was a pretty safe bet in the lead up, but the RBA has indeed pulled the trigger on another rate cut
It was a pretty safe bet in the lead up, but the RBA has indeed pulled the trigger on another rate cut, trimming a further 0.25% off the official cash rate – a drop that has swiftly been taken up by the majority of lenders and should start flowing through to existing borrowers within the next month.
While a quarter of a percent doesn’t sound like a huge amount (and frankly, no, its not), it is indicative of a more sustained change in the RBA’s approach to the Australian economy, and cumulatively, borrowers should start to see a noticeable difference in their finances. With a now half percent drop in 2025, a $500,000 mortgage will now see $2,500 less in interest a year, or a bit better than $200 a month in savings compared to that same loan back in January. If we see the predicted 1% by the end of the year, that’s over $400 a month that borrowers will be better off.
For now, with that extra $200 potentially burning a hole in your pocket – what could (should) you do with it? History shows the majority of borrowers will leave things as-is and not change their repayments to reflect the lower amount, with the extra cash instead going directly to paying down the principal (borrowed amount) of the loan. This is a very easy win for those that can afford it – its not costing you any extra than it used to, but by paying extra off the principal sooner, you not only reduce the overall interest paid but also the payment timeframe.
Alternatively, you can choose to reduce your repayments in line with the new minimum, and use the savings elsewhere. That could be an extra date night a month, paying down debt elsewhere (at higher rates such as a credit card), or as simple (and serious) as helping to cover the groceries each week. Keeping the money in a separate savings account can end up being a false economy though, as typically the interest rate you PAY on borrowings will be higher than you earn on savings, which can also be subject to tax….. this is where having either an off-set account or redraw facility can come in handy.
For those aspiring rather than existing mortgage holders, borrowing capacity will have slightly increased, but there is a risk any extra capacity could quickly be eaten up by higher prices as the market lifts with the tide. Waiting to purchase has rarely aided a buyer in the past 5 years, and that’s a theme looking set to continue.