Get ready for lower rates

A growing chorus of economists are predicting that the Reserve Bank of Australia (RBA) will be announcing a rate cut on 18 February.

If it happens, it will be great news for anyone with a mortgage. It will also be the first time rates have fallen since 2020, and thousands of first home owners may be unsure what to expect.

So, let's take a closer look at what's likely to happen - and how you can prepare for lower interest rates.

What the experts say

Consistently lower inflation is the factor driving expectations of a February rate cut. And it could be the start of an ongoing trend.

NAB Group CEO Andrew Irvine is expecting at least three rate cuts in 2025 while accounting firm Deloitte predicts rates will drop by 0.75% in 2025, and another 0.75% in 2026. Wouldn't that be good?   

The elephant in the room is the job market, which is looking pretty healthy. More people in work brings the potential for more spending, which could push up inflation.

As ANZ Australia Senior Economist Catherine Birch puts it, "We can't write off a hold by the RBA at the February meeting, because there is still a bit of resilience in the labour market."

The bottom line is that a February 18 rate cut is not set in stone. But here's hoping.

How soon will lenders pass on rate cuts of their own?

Assuming the RBA does cut the cash rate in February, it is likely to take things slow, starting with a 0.25% cut.

Lenders don't have to pass the full value of a rate cut to borrowers though you can imagine the backlash if they don't.

The catch is that mortgage holders may not feel the savings straight away. According to Sydney-based Mortgage Choice broker Leanne Johnstone, lenders can take anywhere from a few hours to a few weeks to pass rate cuts onto home loan products.

Of course, this assumes you have a variable rate home loan. If you have a fixed rate, it's business as usual. Your rate and minimum repayments won't change regardless of how market rates move.

How will your home loan repayments be affected?

The sting in the tail is that most lenders don't automatically reduce loan repayments.

Johnstone says you may need to contact your bank if you want to reduce repayments after a rate cut. It could pay to have the bank's number on speed dial.

However, if you can comfortably manage your old (current) repayments, you'll be paying off extra to help clear your loan sooner.

How much could you save with a rate cut?

RBA figures show the average home loan rate is currently 6.30% (I'm talking about owner-occupiers here, investors typically pay more).

At this rate, on a loan of $500,000 with a 25-year term, a 0.25% rate cut would see the monthly repayment drop from $3,314 to $3,257 - a monthly saving of $57.

The bigger your loan, the bigger the savings. As the table shows, on a mortgage of $800,000, a 0.25% rate cut could see monthly repayments scale back from $5,302 to $5,179 - a saving of $123 each month.

And, of course, if rates keep coming down over the year as predicted, your repayments will fall even further. Assuming there are three rate cuts of 0.25% each in 2025, then someone with a $500,000 loan could potentially claw back $229 each month. For someone with an $800,000 mortgage the monthly savings will be $365.

Impact of rate cuts on loan repayments

Calculations made using the mortgage calculator at www.moneysmart.gov.au. Assumes 25-year loan term and $0 monthly loan fees.

What if your lender holds part of a rate cut back?

If your lender doesn't pass on the full rate cut, Johnstone recommends avoiding knee jerk decisions. The important thing is to weigh up your options.

You might consider refinancing to a new lender, but keep in mind this can come with costs, including lender discharge fees, government registration fees, and fees associated with switching to a new loan and lender.

I always recommend doing a break-even analysis before refinancing. This involves adding up all the costs of switching lenders and dividing that by your monthly savings. If, for example, it costs you $1,000 to move but you would save $50 a month in repayments, your break-even point is 20 months, meaning it will take you just under two years to recoup the cost of moving.

The key is to do your own research to compare rates. You may also consider talking to a mortgage broker.

What savers need to know

Not everyone has a home loan - RBA data shows only one in three (35%) Australian households are paying off a mortgage.

Yet most households have some level of savings. And a rate cut will mean lower returns on your spare cash.

As a guide, current average rates are:

•  4.85% for bonus savers (as long as you meet bonus rate conditions)
• 3.50% on 6-month term deposits
•  4.15% on 1-year term deposits, and
•  3.35% on 3-year term deposits.

However, you could do much better. Mozo research shows that by shopping around, it's possible to earn more. Your money could earn 4.90% on a fixed term of less than 12 months with the likes of Bank of Sydney or even 5.10% with Defence Bank.

With the RBA rate decision just around the corner, savers hoping to earn a higher rate may want to lock in a decent rate ahead of the RBA's meeting.

If rates move lower as expected, you may also need to consider taking on more risk to potentially earn higher returns. 

The main point is to look at ways to get more from your money rather than simply accept a lower rate.