With the Reserve Bank’s recent decision to reduce interest rates, many households with mortgages
will soon see a decrease in their minimum required loan repayments. While this is welcome news for
many families feeling the pinch of rising living costs, it also presents a unique financial opportunity.
If your household budget allows, maintaining your current repayment amount—even as your
required minimum falls—can have significant long-term benefits.
The Power of Paying More Than the Minimum
When interest rates drop, your lender recalculates the minimum repayments based on the lower
rate. However, by continuing to pay at the same higher rate you were previously, you’re effectively
paying more towards the principal component of your loan rather than interest. Over time, this can
dramatically reduce the total interest paid and shorten the life of your mortgage.
Here’s why this matters:
• Faster Loan Repayment: By keeping repayments steady, more of each payment goes to
reducing your loan balance. This means you’ll pay off your mortgage sooner.
• Interest Savings: Even modest additional repayments can lead to thousands (or even tens of
thousands) in interest savings over the life of a loan.
• Increased Equity: Paying down your mortgage faster also increases your equity in the home,
which can be beneficial if you plan to refinance, renovate, or eventually upgrade.
A Practical Example
Let’s say you have a $500,000 mortgage with 25 years remaining. With an interest rate drop from 6%
to 5.75%, your monthly minimum repayment might reduce by around $80. If you continue paying at
the higher $3,220 level instead of dropping to $3,140, you could save over $10,000 in interest and
shave more than a year off your loan term. (Exact figures will vary depending on your loan type and
lender.)
The Bottom Line
While the temptation to reduce repayments and enjoy the extra cash flow is understandable,
especially with household budgets under pressure, keeping your repayments at the higher level—if
affordable—can be one of the most effective and low-risk financial strategies available.
It’s a simple change that requires no additional investment but offers substantial long-term rewards.
If you’re unsure what’s best for your situation, consider speaking with your lender or a qualified
financial adviser to explore the potential benefits tailored to your circumstances.
Written by
Aaron McInnes
Financial Planner | Mortgage Broker
Grad.DipFS(FP), DipFS(FMBM), SMSF Adviser