Why investing savings from a rate cut could boost your long-term financial position
If you’re one of the millions of Australians with a variable rate mortgage, you’ve received a bit of breathing room in your monthly budget following the May interest rate cut.
The Reserve Bank’s 0.25% cash rate cut on 20 May has helped to ease mortgage repayments, and with inflation under control in the quarterly data released today, an additional August cut is looking hopeful.
On a $600,000 mortgage with 25 years remaining, a cut from 6% to 5.75% means your repayments could drop by $91 a month. Add in the February rate cut, and you’re now saving $183 a month compared to the start of 2025.
If we see an additional rate cut in August, we have many clients asking…
What should we do with the extra cash?
That depends on your goals, risk tolerance, and financial situation.
Speaking broadly, you’ve got two options:
- Put the savings back into your mortgage to pay it off faster
- Invest it elsewhere, such as in growth assets like shares
Let’s take a look at how each approach stacks up.
Option 1: Pay Down Your Mortgage
Let’s say you decide to keep your repayments the same as they were before the recent rate cuts.
On a $600,000 loan over 25 years at an initial interest rate of 6.25%, your monthly repayments would have been around $3,958.
Dropping the rate to 5.75% would reduce repayments to $3,775. But let’s see what happens if you stick with paying your original higher amount.
- Total interest paid drops from $587,412 to $473,084
- Loan term shortens by 2 years and 4 months
- Total savings in interest: $114,328
A huge difference in interest paid over the life of the loan in one simple move! You pay off your loan faster and save a significant chunk of interest.
Option 2: Invest the Savings
Alternatively, you could take that extra $183/month and invest it in the share market.
Historically, the Australian share market has returned around 8.2% p.a. over the past 25 years (based on the S&P/ASX All Ordinaries Total Return Index, with dividends reinvested).
If we use this average for our predictions:
- Investing $183/month for 25 years would grow to $181,214
- That’s $66,886 more than the interest you’d save by putting the same amount into your mortgage
Of course, investing carries more risk than paying down a loan, and returns can fluctuate.
But over the long term, the potential gains may outweigh the benefits of faster mortgage repayment.
What’s the Best Option?
There’s no one-size-fits-all answer.
It all depends on your unique set of circumstances, including:
- Your risk tolerance
- Whether you value financial security or higher long-term returns
- Your current debt and interest rates
- Your future cash flow needs and tax situation
A popular middle-ground strategy for many Australians is using mortgage offset accounts — transaction accounts linked to your home loan that reduce interest by offsetting the loan balance.
There’s over $300 billion currently sitting in these accounts nationwide, showing just how widely used they are.
Our Final Thoughts
Over a 25-year loan term, investing your mortgage savings could potentially leave you better off than simply reducing your loan balance — but it comes with higher risk and possible tax implications.
Likewise, interest rates may fluctuate many times over the life of your loan, affecting both your repayments and investment strategy.
If you’re receiving a rate cut windfall, it’s a great time to review your financial plan and decide how to make your money work harder for you. Get in touch with our team to discuss your best plan of attack to make the most of the May interest rate cut.
