There is a better-than-even chance that the Reserve Bank will start a monetary policy easing cycle at its meeting on February 18. That means interest rates will soon be cut.

What’s more, money market investors have close to four 25 basis point interest rate cuts factored in between now and the first half of 2026, meaning the interest rate cutting cycle will have a material impact on the cash flows of all mortgage holders.

For everyone with a mortgage and a small business loan, these probable interest rate cuts will see a sharp reduction in monthly repayments.

Cash will be freed up to allow borrowers to spend elsewhere in the economy or indeed, reduce their debt, which will be supportive of economic growth and the continued excellent health of the labour market.

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The savings rule of thumb

There are many different mortgages available to borrowers which means the savings from the interest rate cuts will be somewhat different according to the duration of your loan, whether there is a fixed rate component or if there were any special deals linked to the loan when you initially signed up for your mortgage.

For those with a standard 25-year principal and interest mortgage, at the current interest rate of 6.25 per cent, for each $100,000 of outstanding debt, a 25 basis point rate cut will reduce your required repayments by $16 a month.

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For a $300,000 mortgage, that’s a saving of $48 a month, per 25 basis points.

If your mortgage balance is $500,000, for example, each 25 basis point cut in interest rates reduces monthly repayments by approximately $96.

Four 25 basis point cuts in interest rates, that is a full one percentage point cut, will lower monthly repayments by approximately $376.

Just to repeat - the rule of thumb of $16 per month for every $100,000 of debt for a 25 basis point rate cut holds true for a standard 25 year mortgage.

Interest rates are NOT going back to the COVID pandemic lows

One thing to not just note but to highlight when looking at the upcoming interest rate cutting cycle is that interest rates will not go back to the lows of the 2020 and 2021 when the RBA slashed official interest rates to 0.1 per cent with mortgage rates around 2.5 per cent.

Recall that these interest rates were implemented when the pandemic sparked the mass closures of businesses and borders, inflation was near zero, unemployment was spiking and there were legitimate fears that the economy would experience something akin to a “Great Depression” catastrophe.