A mortgage broker has revealed how borrowers could shave tens of thousands off their home loan and pay it off quicker following the Reserve Bank of Australia’s (RBA) interest rate cut this week. The central bank lowered the cash rate by 25 basis points to 3.85 per cent on Tuesday, the second cut this year.

All of the Big Four banks have confirmed they will pass on the rate cut in full to variable customers in the coming weeks. But if you’ve been managing with the higher repayments, Nexus Loans director Jessie Boyce said it can be a “smart play” to not reduce your repayments.

“Quite a few of my clients are choosing to keep their repayments at the same level,” Boyce told Yahoo Finance.

“With interest rates dropping, it’s a great opportunity to get ahead without stretching the household budget — especially if repayments were already comfortably manageable.”

RELATED

• Bendigo Bank passes on RBA interest rate cut as nearly 60 hold off giving $91 mortgage relief

• Major bank warning after ANZ customer left 'dumfounded' by cash issue

• Inheritance warning as 'disgruntled' Aussies left out of wills in growing trend: ‘Inevitable’

Boyce gave the example of someone with an $800,000 loan with an interest rate of 6 per cent and a 30 year loan term. Their monthly repayments would be around $4,798.

If the interest rate drops to 5.75 per cent, repayments would also drop to about $4,668, or a saving of about $130 a month.

But if they kept paying the higher repayment amount, they could shave nearly two years off their loan and save more than $70,000 in interest.

“Even modest extra repayments early on can make a big difference over the life of the loan. It also helps strengthen equity — giving borrowers more options in the future,” Boyce said.

It’s an approach some borrowers have taken following February’s interest rate cut, with Commonwealth Bank revealing just 14 per cent of its eligible customers had asked to reduce their direct debit to the minimum.

Who might this approach suit?

Boyce said the strategy was ideal for borrowers who had some financial breathing room and don’t need access to immediate cash flow relief.

“It’s particularly smart for those with long loan terms or owner-occupied properties, where building equity can support future goals like upgrading, renovating, or investing,” she told Yahoo Finance.

Are there any downsides to consider?

Along with cashflow considerations, Boyce said there are also extra considerations for investors around tax efficiency.

“Making extra repayments directly into an investment loan reduces the loan balance, which also reduces the amount of interest that can be claimed as a tax deduction. This could limit the potential tax benefits over time,” she said.