What Happens to My Home Loan Repayments When Interest Rates Go Down?

The Reserve Bank of Australia has cut interest rates for the first time since November 2020. At its February meeting, the RBA board decided to decrease the cash rate by 0.25 percentage points to 4.1%.

So far, most banks have announced that they will pass on the 0.25% reduction in full. The list of banks and the dates they will pass on the rate cut are shown below.

Ok, so there is a rate reduction coming… What does this mean for your home loan repayments?

Principal and Interest (P&I) Repayments

When interest rates decrease, the interest on your loan will be calculated at the new, lower rate. However, if you’re making Principal and Interest (P&I) repayments, your minimum repayment may not decrease automatically.

Banks typically handle this in two ways:

1. They automatically reduce your P&I repayments to reflect the new lower minimum amount.
2. They keep your repayments the same – meaning you’ll pay off more of your principal because the interest portion of your repayment is lower. If you prefer to reduce your repayment to the new minimum, you can adjust it via your bank’s app, internet banking, or by calling your bank.

What If You Don’t Reduce Your P&I Repayments?

For example:

• If your loan balance is $400,000 and your old interest rate was 6.14%, your minimum repayment was $2,435/month (Scenario 1).
• With a rate cut to 5.89%, your new minimum repayment would be $2,370/month (Scenario 2).
• If you keep your repayment at $2,439/month (Scenario 3, which is close to Scenario 1), you could reduce your loan term by approximately one year!

So, if you can afford to keep your repayment the same, it’s a smart move that will help you pay off your loan faster.

Interest Only Loans

If your loan is interest-only, your repayment amount will decrease because the interest charged is now lower.

Ongoing Loan Reviews

We will continue to review your loan every 6 to 12 months to ensure it remains competitive and suitable for your financial needs.