What do interest rate cuts mean for homeowners? 

Hearing the words “the Reserve Bank of Australia (RBA) might be decreasing the cash rate” is the ultimate good news for Australian mortgage holders. Why? Because it often means home loan rates are set to drop. 

But before you upgrade your coffee machine or book flights to Europe with those potential extra savings — what do interest rate cuts actually mean for your home loan? Are interest rate cuts a good or bad thing? And is there anything you need to do to prepare? 

Let’s break it down.

What causes interest rates to drop?

Interest rates don’t go up and down just for the sake of it.

There’s a bigger picture at play, and it all comes down to what’s happening in the economy at any given time. The two key players in setting home loan interest rates are the Reserve Bank of Australia (RBA) and the lenders (AKA the banks).

First up, the RBA — Australia’s central bank and the big decision-maker when it comes to monetary policy. Their job? Keeping the stability of our currency, employment rates and economic prosperity. One of the main ways they do this is by setting the cash rate, the benchmark interest rate that influences how much banks pay to borrow money.

Then, there’s the lenders. When the RBA moves the cash rate, it affects how much it costs banks to borrow money. In many cases, lenders adjust their interest rates accordingly, which means changes in the cash rate tend to flow through to your home loan.

Bottom line? The RBA’s decisions have a real impact on home buyers, setting off a chain reaction that trickles down to your mortgage repayments.

But wait, how does the RBA decide on the cash rate?

Once again, it’s not random.

The RBA has two main goals when setting the cash rate:

• Keeping inflation within the 2–3% target range
• Maintaining stable employment levels

If we zoom in on February 2025, inflation has been sitting above 3% since mid-2021. To bring it back down, the RBA has been hiking up rates and keeping them high to slow things down.

But here’s the good news: inflation has finally dropped below 3%, which means rate cuts are likely on the horizon. And when the RBA drops the cash rate, lenders usually follow.

So, what do dropping interest rates mean for your home loan?

A few things (and mostly good things!)

• Lower interest charges – ok, it sounds obvious, but dropping interest rates mean lower interest charges per month. And lower interest charges generally occur as soon as your lender drops their rates (booyah!) Yep, even though you repay your home loan on a monthly (or weekly or fortnightly) basis, interest rates are calculated daily. So you’ll be paying less interest from the day the new rate comes into effect. 

• Potential for lower repayments – lower interest rate charges could potentially lead to lower repayments if you’re on a variable rate (but this doesn’t always happen automatically). You *could* still end up paying the same amount each month, which brings us to our next point…

• You could pay off your loan, sooner – if you continue with the same repayments, but less of that repayment is going toward interest, it could help you get ahead on your mortgage and pay off your loan slightly faster. 
  
• Extra cash-money – if you work with your lender (or friendly broker) you could potentially arrange lower repayments (remember, this might not always happen automatically). This might give you a bit more money to play with each month, freeing up disposable income. You could funnel this toward other expenses like a car or renovation.

If I’m on a variable rate, will my interest rate automatically go down?

Yes! Your interest rate will automatically come down if your lender reduces their rates and they become effective (woo!) That means you don’t have to do a thing. 

But – importantly – this doesn’t always translate to lower repayments from the get-go. Lenders can often leave you on the same repayments unless you say otherwise. This could work in your favour (if you’re keen to pay down more of your principal balance and chip away at your loan). But if you want to move to lower repayments to free up some cash, you might need to chat with your lender or consider refinancing (with the help of your broker, of course).

It’s important to note, not all lenders will leave you on higher repayments, it does vary a lot from bank to bank. So it’s always good to check in with your broker to see what’s happening in your situation. 

What if I’m on a fixed rate?

Unfortunately, if you’re on a fixed interest rate when market rates drop, you might not benefit (at least straight away) from the lower rates. 

Fixed rates mean exactly that – you’re fixed to that rate for the duration of your fixed term. But hey, maybe you benefited from a nice rate in a time when rates were rising – and you could get a nice drop once your fixed term is over (sometimes it checks out).

Learn more: should you fix your home loan?

Is there anything I can do to prepare for dropping interest rates?

Preparation is music to our ears at Finspo. 

Here’s what you can do ahead of impending rate cuts.

• Know your interest rate. Your lender won’t necessarily tell you when your interest rate is changing, so it’s good to record what your interest rate is right now so you notice when it drops. You can typically find this in your banking app or on your home loan statement. 

• Research.  Want to know what your rate could look like after interest rate cuts? We don’t blame you – potential savings is exciting. Visit our repayment calculator to see the impact changing rates will have on your scenario. 

• Make a plan. If you do benefit from dropping rates, will you use that money toward another goal? Or would you prefer to continue with higher repayments with the goal of paying off your loan, sooner?

• Chat with a broker (that’s us). It never hurts to check in with your broker to get a detailed overview of your situation and weigh up what savvy financial moves might work for your situation. 

What do dropping interest rates look like in practice?

Let’s take Mike, for example. 

Mike currently has a $350,000 mortgage and is making monthly repayments of $2,171 at a variable rate of 6.32%.

When interest rates drop, his bank automatically drops his rate down to 6.07%. Woo! However, his lender doesn’t automatically drop his repayments (meaning he will be chipping away at more of his principal balance).

After working with his broker, he decided to make the most of dropping rates and refinance to lower monthly repayments, bringing his monthly repayments down to $2,114. He finally gets some financial relief after years of rate hikes. 

(Assumes a 30 year loan and principal and interest repayments).

Questions on interest rate cuts?

Will interest rates continue to drop?

We can’t say for sure. But we can look at predictions from the big four banks and leading economists to draw some insights – and early predictions are looking promising for multiple rate cuts in 2025. Learn more about what’s happening in 2025: When will interest rates go down?

Generally, do all lenders drop rates by the same amount?

It’s not easy to predict. But historically, lenders have behaved differently (generally not always the same as the RBA). To keep an eye on what’s currently happening with interest rates, check out our interest rate tracker. We continue to update this list. 

How soon after rate drops are announced do they kick in?

When banks and lenders announce their rate cuts they’ll include an effective date. This is when your home loan will begin to be calculated at the new rate. In saying that, your repayments may not change immediately (chat with a broker if you’re in doubt). 

Find out exactly what dropping interest rates mean for your situation

As a homeowner, dropping interest rates are often something to celebrate, especially if you’re currently on a variable rate. 

But it’s best to chat with a mortgage broker (that’s us!) to find out exactly what dropping interest rates mean for YOU. 

In most cases, dropping rates can lower your repayments and free up more money, or help you chip away at more of your principal balance. 

Ready to explore your options? Chat with a friendly Finspo expert today for free. 

About us

Finspo is an online mortgage broker, offering home loan solutions to clients Australia-wide. Our point of difference is that not only do you get a great Finspo mortgage broker, you also get a proposition supported by cutting-edge technology to give you a five-star mortgage broking experience.

Book a meeting