The recent Reserve Bank of Australia (RBA) rate cut has brought some much-needed relief for homeowners and property investors across Australia. With the cash rate now at 4.10%, down from 4.35%, many borrowers are now paying less on their mortgage repayments. But with this extra cash flow, the big question is: What’s the smartest way to use these savings?
Should you save it, invest it, or pay down your mortgage faster? Let’s dive into some practical strategies to help you make the most of your savings after the RBA rate cut.
Understanding Your Financial Priorities: Save, Invest, or Pay Down Debt?
Before you decide how to use your extra cash, it’s crucial to get clear on your financial goals. Here are three smart options to consider:
1. Save
If you don’t already have an emergency fund, now’s the perfect time to start one. Aim to save at least 3 to 6 months’ worth of living expenses in a high-interest savings account. This safety net will protect you against unexpected expenses, such as car repairs or medical bills, without having to rely on credit.
2. Invest
If you’re looking to grow your wealth over the long term, investing could be a smart move. Consider these options:
- Property Investment: The recent rate cut is expected to boost borrowing capacities and increase buyer confidence, making property investment an attractive option.
- Shares and ETFs: If you’re comfortable with a bit of risk, investing in shares or ETFs could offer higher returns compared to traditional savings accounts.
- Superannuation Contributions: Boost your retirement savings by making additional contributions to your superannuation.
3. Pay Down Debt
One of the most effective ways to use your savings is to pay down your mortgage faster. By keeping your repayments the same even after the rate cut, you’ll reduce the principal faster, saving on interest and paying off your loan sooner.
Here’s how it works:
- On a $600,000 home loan with a 30-year term at 6.25% interest, the minimum repayment is $3,695 per month.
- With the rate cut, your minimum repayment would drop to $3,595.
- If you keep paying $3,695, you’re effectively paying an extra $100 towards the principal every month.
The Benefits:
- Shave Years Off Your Loan: By maintaining your existing repayment amount, you could cut down your loan term by up to 2 years, saving tens of thousands in interest.
Save on Interest: On a $600,000 loan, you could save over $61,000 in interest by paying off the principal faster.
How to Shave Years Off Your Loan by Keeping Repayments the Same
One of the smartest moves you can make is to keep making the same repayments, even though your minimum requirement has dropped. By paying off more of the principal each month, you’ll not only pay off your loan faster but also save a significant amount on interest.
Example Scenario:
- Loan Amount: $641,416 (average home loan in Australia)
- Interest Rate Before Cut: 6.35%
- Interest Rate After Cut: 6.10%
- Old Monthly Repayment: $3,884
- New Monthly Repayment: $3,784
According to research collected by Finder, mortgage holders with an average home loan of $641,416 will still be paying $3,784 every month even after the rate cut. If you continue paying the pre-rate cut amount of $3,884, the extra $100 will go directly towards the principal, helping you pay off the loan faster and save on interest.
Want to see how much you could save? Use our Loan Repayment Calculator to crunch the numbers and find out how this strategy could work for you.
Investing in Property vs. Other Investments: What Works Best?
The RBA rate cut is expected to fuel competition in the home loan market, which means you might be able to get an even better deal by refinancing. But should you use the savings to invest in property or look at other investment options?
Property Investment
- Pros: Potential for capital growth, rental income, and tax benefits (negative gearing).
- Cons: High entry costs, ongoing expenses (maintenance, property management), and market fluctuations.
The rate cut is likely to boost borrowing capacities and buyer confidence. In fact, REA Group suggests that house prices may see a short-term rise due to increased demand.
Other Investments
- Shares and ETFs: If you’re comfortable with market volatility, investing in shares or ETFs can provide higher returns compared to traditional savings.
- Superannuation Contributions: Making extra contributions to your super can be a tax-effective way to grow your retirement savings.
Building an Emergency Fund: Why It’s More Important Than Ever
If the past few years have taught us anything, it’s the importance of financial security. An emergency fund provides a safety net for unexpected expenses, such as:
- Job loss or reduced income
- Medical emergencies
- Unexpected home or car repairs
How Much Should You Save?
Aim for 3 to 6 months’ worth of living expenses in a high-interest savings account. This will give you peace of mind and prevent you from going into debt when life throws a curvebal
Ready to Make the Most of the RBA Rate Cut?
The RBA rate cut is more than just good news – it’s an opportunity to get ahead financially. Whether you decide to pay down your mortgage, invest, or build an emergency fund, the key is to make an informed decision that aligns with your financial goals.
At Lagos Financial, we’re here to help you navigate these decisions. Our expert team can provide tailored advice to ensure you’re making the smartest moves with your savings.
Book a Complimentary Assessment today and let us help you make the most of the RBA rate cut.
