This year, the Reserve Bank has cut Australia’s official cash rate twice – the latest adjustment bringing it down from 4.10% to 3.85% – with a third on the horizon.
And while that might sound like background noise to anyone more concerned about the State of Origin decider, dinner reservations, or the new F1 movie, trust me – it matters. A lot. But not in the way most people think.
Whether you’re chipping away at a mortgage, have some skin in the investing game, or you’re simply trying to keep your Uber Eats addiction under control, the interest rate cuts have something in store for you.
Here’s what the interest rate cuts means and – more importantly – what you should do.
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Mortgage Holders
“Wait, I get to breathe again?
For those of you paying off a home, this rate cut might feel like a long-overdue break after a brutal 18-month run of hikes. And yes, you might be looking at a slightly lower repayment soon – think somewhere in the ballpark between $50 to $150 a month, depending on your loan size.
The Good News
- Lower repayments = more room in the budget.
- Did your lender pass on that rate cut? Don’t just assume yours will – this could be a perfect time to refinance for a better deal.
- If you’ve been throwing everything at the mortgage during the rate hike season, now’s the time to rebuild some buffers, e.g. savings account, an offset account, maybe even just a weekend off stressing.
The Catch
- The banks might drag their feet. Not all of them pass rate cuts on in full, and if they do, it’s often after the headlines have moved on.
- There’s a risk of thinking this is the start of a “new era” of low rates. Let’s pause on those thoughts for now. We’re still in a volatile market, so don’t hatch those proverbial chickens just yet.
- Complacency is your enemy.
A client of mine called last week to ask if now was the time to fix their rate. My recommendation? Probably not (profound isn’t it?).
Fixed rates are based on market expectations, and those expectations are still pretty jumpy. In the meantime, flexibility might be worth more than certainty, and lest we forget: banks rarely lose on fixed rates.
The Takeaway
Don’t celebrate too early.
Yes, breathe easier. But use the reprieve to asses your home loan, polish your money plan, and ask your bank the question you should’ve asked months ago: “Can you do better than this?”
Asking to be put through to the ‘discharge’ department often makes the banks jumpy and more willing to make a deal, so ask the question of the right department and you may save even more.
Investors
“Alright, what’s the play here?”
If you’ve got money in the market (or want to), it’s easy to get excited when interest rates start to fall. After all, lower rates tend to push up asset prices. Stocks, property, crypto… everything starts to look a little shinier when the cost of money drops.
Keep in mind, however, that stocks, gold, silver, and crypto are at (or close to) all-time highs, while property prices have been steadily rising despite the higher interest rates.
The Good News
- Cheaper debt = better leverage. For property investors, this might be the signal to start looking for that next property to buy.
- Equities could receive a boost. Lower rates often mean more liquidity, and more profits for business (translation: more people buying stuff).
- Cash sitting in offset accounts or high-interest savings might now be earning less, so putting it to work through investing becomes more appealing.
The Catch
- If you’re chasing yield, this hurts. Term deposits and savings accounts are going to drift south again.
- Markets had already priced in the most recent rate cut, don’t expect your ETF to double overnight.
- More demand (and cheaper debt) could push property prices higher again. We’ve already seen an increase in buyer interest in recent months.
Here’s a trick I teach my clients: when rates drop, re-run your numbers on any investment you’re considering. Lower repayments might improve your cash flow, but don’t forget that higher asset prices mean you could be paying more up front.
The Takeaway
Don’t FOMO into anything. A rate cut can open doors, sure, but only walk through if the numbers still stack up.
Household Budgets
“Can I actually stop living on almonds and black coffee now?”
This is where most people feel it first. Lower interest rates impact everything from your groceries to your holidays… even if you don’t notice it at first.
The Good News
- If your mortgage or personal loan gets cheaper, that means more disposable income.
- Less interest = more flexibility. And in households with kids, that can feel like a superpower – be sure to use it wisely.
- If businesses feel confident, they might invest more. That’s music to the economy’s ears and potentially your job security/pay packet.
The Catch
- Don’t expect prices to fall. If anything, spending might pick up again (which can keep inflation stubbornly high).
- The RBA isn’t cutting rates just for fun. This is a tactical move, possibly a sign of slower growth or rising unemployment in the wings.
- That little extra cash? It can disappear quick if you don’t give it a job or put it to work.
The Takeaway (And My Rule)
You’ve lived without this money for months now, don’t spend it just because it’s there. Use lower repayments as a way to strengthen your position, not justify new expenses.
Every dollar you save from lower interest payments should be given a purpose that’ll improve your wealth. Take the opportunity to audit where your money is going and where it could be going: reduce debt, bolster investments, or save for a future holiday…
… alright, that last one’s not going to tangibly improve your wealth, but let’s not pretend we don’t need something to look forward to (and it could prevent you from using credit cards).
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Whatever you do, don’t let the headlines manage your money!
A rate cut is just a lever. It’s not a windfall. And it definitely isn’t an excuse to throw your financial plan out the window.
Use this moment to pause, assess, and get strategic. Whether it’s checking in on your mortgage, fine-tuning your investments, or just taking back control of your household cash flow, this is your chance to make the rate cut mean something.
In the words of Warren Buffett: “The most important investment you can make is in yourself.” So while the market reacts, stay focused, educated, and confident. That’s how wealth gets built – with or without an interest rate cut.
The information provided in this article has been prepared without taking into account your objectives, financial situation, or needs. Speak to a licensed financial advisor for advice specific to your circumstances. All investing involves risk.
