The Reserve Bank of Australia (RBA) has recently cut the cash rate by 0.25 percentage points to 4.10% – the first rate drop since 2020. For many Australians, this could mean a bit of extra breathing room, with lower loan repayments and cheaper borrowing costs. But before you start dreaming about what to do with that extra cash, this is a great opportunity to make some smart financial moves that can set you up for the future.
Interest rates affect everything from your mortgage to your savings, so a drop like this is the perfect time to take a step back and reassess. Maybe it’s a chance to pay off your loan faster, build up your savings, or even look into investing. Whatever your goals, being proactive now can make a real difference down the track.
So, how can you make the most of this rate cut?
1. Keep your loan repayments the same
If you have a home loan, one of the best things you can do when rates drop is to continue paying the same amount as before.
This is because every extra dollar you put in goes straight toward your principal, reducing the amount of interest you’ll pay over time and helping you clear your loan faster.
For example, if your mortgage rate drops from 6% to 5%, calculate your new minimum repayment, but keep paying the old amount. You won’t notice a difference in your budget, but you’ll be making a serious dent in your loan balance.
2. Boost your emergency fund
Lower interest rates often mean reduced returns on savings, but that doesn’t mean saving should take a back seat. If your loan repayments have decreased, use that extra cash to build or strengthen your emergency fund.
Aim to set aside three to six months’ worth of expenses to cover unexpected situations like job loss or medical bills. Even though a typical savings account may not offer the same high returns in a low-rate environment, having a financial safety net is important.
Consider keeping your emergency fund in a high-interest Term Investment or an offset account linked to your mortgage to make the most of your money.
3. Reassess your debts
Now is the perfect time to review your debts and explore ways to save.
- Credit cards & personal loans: if the interest rates on these haven’t dropped, look into better deals or consider transferring balances to lower-rate options.
- Debt consolidation: rolling multiple debts into a single, lower-interest loan can simplify your repayments and reduce overall interest costs.
Taking action while rates are low can free up more cash in your budget and help you pay down debt faster.
4. Consider Refinancing
When interest rates drop, lenders compete for new customers, meaning you could secure a better deal by refinancing your home loan or personal loans. Refinancing could lead to lower interest rates, reduced fees and more flexible loan features.
Before making a move, check for exit fees on your current loan and calculate whether refinancing will save you money in the long run. A financial advisor can help you compare options and ensure you’re making the right choice.
5. Think about investing
A low-interest-rate environment can make borrowing more attractive, but it may also mean lower returns on traditional savings. This could be a good time to explore investment options that align with your goals and risk tolerance.
Options to consider may include:
- Superannuation: making extra contributions can grow your retirement savings through compounding returns.
- Term Investments: putting your savings inside a fixed high-interest Term Investment is a great way to get more bang for your buck when interest rates are lowering.
- ETFs & shares: long-term investments can offer growth potential, but be mindful of market fluctuations.
- Property: lower rates can make buying or investing in real estate more affordable.
If you’re unsure where to start, a financial advisor can help tailor a strategy to suit your needs.
6. Prepare for the future
Interest rates won’t stay low forever. Now is the time to future-proof your finances so you’re prepared when rates eventually rise again.
- Build a financial buffer by saving extra in an offset account or redraw facility.
- Pay down debts faster while rates are low to reduce the impact of future increases.
- Review your financial plan to ensure you’re on track for your long-term goals.
A little planning now can help you avoid financial stress later.
Make low rates work for you
Low rates won’t last forever, so now’s the time to make them work for you. Whether you’re looking to pay down debt, boost your savings, or make a smart investment, a little planning today can set you up for a stronger financial future.
With a friendly team and over 25 financial services including Term Investments, Home Loans, Personal Loans and Financial Planning, we’re here to guide you through interest rate changes with care and help you make the most of every opportunity.
Learn more about APS Services.
Written by Supervisor – Operations, Dale Engberg.
With seven years of experience in lending and savings, Dale brings a wealth of expertise to the APS team. Before joining us, he worked in the clearing house division of a payroll company, managing large accounts and data file writing. Now, he’s here to help with Personal Lending, Mortgages, Credit Control, and Investment Savings Accounts. Outside of work, Dale loves spending time with his family, diving into the world of gaming and PC hardware, and cheering on his favourite AFL/AFLW team, the Melbourne Demons.