Smart borrowers can take advantage of lower interest rates by keeping their loan repayments at the same level as before the rate cut.

For example, an owner-occupier with a $1 million loan at a variable rate of 6.33% will see their rate drop to 6.08% if their lender passes on the full rate cut. This would reduce their minimum monthly repayments from $6,209 to $6,047. However, by continuing to pay $6,209 each month, they could:

• Pay off their mortgage two years sooner
• Save $96,362 in interest

If additional rate cuts occur, as some banks predict, homeowners who stick to their original repayment amount could cut their mortgage term by six years and save an additional $235,302 in interest.

Even borrowers with smaller loans can benefit. A first-home buyer with a $641,462 mortgage who follows this strategy for multiple rate cuts could save $150,926 over the life of the loan. A borrower with a $2 million loan could save $470,603 in interest and reduce their loan term by two years.

Financial expert and property investor Shannon Smit knows firsthand how powerful this strategy can be. In the early 1990s, she purchased her first home during one of the toughest financial periods in Australian history - when interest rates soared to 17.1%.

“It was a struggle, but I made sure I could meet the repayments,” Shannon recalls. When rates eventually dropped, she resisted the temptation to reduce her repayments.

“The result? I took huge chunks off my loan and paid off my first home exponentially sooner than anticipated,” Shannon explains. “Did I miss out on anything important? Not really. Once you're used to paying more, maintain that pattern to benefit you.”

To make this work without feeling deprived, Shannon suggests small lifestyle adjustments:

• Make your own coffee instead of buying one daily
• Bring your own lunch instead of eating out
• Catch up with friends for a walk or a BYO picnic instead of an expensive dinner out

“These small sacrifices add up over time,” Shannon says. “The things you think you’d miss out on? They’re often not the things that truly add value to your life.”

Instead of reducing repayments when rates drop, keep paying the same amount. This will directly reduce your principal balance faster, cutting years off your mortgage.

Example:

• Loan: $500,000 at 6.33%, repaying $3,105/month
• New rate: 6.08% → new minimum repayment $3,027/month
• By keeping payments at $3,105/month, you could save $48,000 in interest and pay off your loan four years sooner!

If lower interest rates leave extra cash in your budget, consider:

• Making extra lump-sum payments on your mortgage
• Increasing repayments slightly each month
• Putting the savings into an offset account to reduce interest

Many borrowers have been stuck in "mortgage prison" - unable to refinance because they don’t pass the banks’ stress tests. With a rate cut, serviceability requirements also adjust, meaning some homeowners may now qualify for better loan deals.

Tip: Contact your lender to negotiate a better rate, or check if you now qualify to refinance. Some banks may pass on the full rate cut, while others might not, so it’s worth shopping around. At Smart Mortgage & Lending we specialise in taking a strategic approach with your lending, considering your overall tax and financial position to ensure lennding that truly works for you.