Why You Should Maintain Your Existing Repayment When Interest Rates Drop: A Smart Move for Australian Homeowners
Interest rates are a hot topic in the Australian mortgage market, and for good reason. They directly impact how much you pay for your home loan, and even a small drop can feel like a breath of fresh air for your budget. With the Reserve Bank of Australia (RBA) cutting the cash rate this week (18th February 2025) many lenders will reduce their interest rates by the full cut of 0.25% in the coming weeks. Many homeowners will be tempted to lower their monthly repayments. After all, who wouldn’t want a little extra cash in their pocket each month?
But here’s the thing: maintaining your existing repayment amount, even when interest rates drop, can be one of the smartest financial decisions you make as a homeowner. Let’s dive into why this strategy is worth considering, especially in the context of the Australian mortgage market.
1. Pay Off Your Loan Faster
When interest rates drop, your lender will typically recalculate your minimum repayment amount based on the new rate. If you stick to your original repayment amount, you’ll be paying more than the minimum required. This extra amount goes straight toward paying down your principal, which means you’ll reduce your loan balance faster.
For example For example, let’s say your mortgage has 25 years remaining and you have a balance outstanding of $500,000. Your repayment prior to the rate drop was $3,265 (6.14% variable rate) was reduced to $3,188, a saving of $77 per month. If you continue the old repayment of $3,265 you will take 1.25 years off your home loan and save over $27,500 in interest.
You can check out your savings on our Extra Repayment Calculator.
2. Build Equity in Your Home Sooner
Equity is the difference between the value of your home and the amount you owe on your mortgage. By maintaining your existing repayment and paying down your principal faster, you’ll build equity in your home at an accelerated pace. This can open up opportunities down the track, such as refinancing for a better deal, accessing equity for investing, or even upgrading to a new property.
In Australia’s competitive property market, having more equity can also give you a stronger financial position if you decide to sell or invest in additional properties.
3. Protect Yourself Against Future Rate Rises
Interest rates in Australia are cyclical. While rates may be low now, they won’t stay this way forever. By maintaining your existing repayment amount, you’re essentially “stress-testing” your budget against future rate rises. If you’re already comfortable paying a higher amount, you’ll be better prepared when rates eventually go up.
This approach also gives you a buffer. If rates rise significantly in the future, you may not feel the pinch as much because you’ve already been paying more than the minimum.
4. Maximise the Benefits of Compound Interest
When you pay extra toward your principal, you’re reducing the amount of interest that compounds over the life of your loan. This is because interest is calculated on the outstanding balance of your loan. By chipping away at your principal faster, you’ll save significantly on interest costs over time.
For example, on a $500,000 loan with a 25-year term, even a small increase in your repayments can save you tens of thousands of dollars in interest. That’s money you could put toward other financial goals, like saving for retirement, investing, or even taking a well-deserved holiday.
5. Take Control of Your Financial Future
Maintaining your existing repayment when interest rates drop is a proactive way to take control of your financial future. It’s a disciplined approach that can help you achieve financial freedom sooner. Plus, it’s a strategy that works regardless of market conditions—whether rates are rising, falling, or staying the same.
What If You Need the Extra Cash?
We get it life happens, and sometimes you need that extra money for other expenses. If that’s the case, consider splitting the difference. For example, if your repayment drops, you could always allocate half to your loan and keep the other half for yourself. This way, you’re still making progress on your mortgage while giving yourself some financial flexibility.
Alternatively, you could use the extra funds to build up an emergency savings offset account or pay down other high-interest debt. The key is to have a plan and make intentional decisions with your money.
Final Thoughts
In the ever-changing landscape of the Australian mortgage market, maintaining your existing repayment when interest rates drop is a powerful strategy to pay off your loan faster, build equity, and save on interest. It’s a simple yet effective way to take control of your financial future and make the most of low-rate environments.
At Fox Mortgages, we’re here to help you navigate your home loan journey with confidence. If you’re unsure about how to adjust your repayments or want to explore other strategies to optimise your mortgage, contact our team. We’ll work with you to create a plan that aligns with your goals and sets you up for long-term success.
Remember, your mortgage is more than just a debt—it’s an opportunity to build wealth and secure your financial future. Make every repayment count!
Disclaimer: This blog is for informational purposes only and does not constitute financial advice. If you would like to review your home loan you can book an appointment here.