How to pay off your mortgage faster

Should the RBA cut the official rate to 3.85% in today’s announcement, and banks pass it on in full, our research shows borrowers on a $600,000 loan could see monthly repayments drop by $91.

However, if this happens, many borrowers will not see their minimum monthly repayment and direct debits drop automatically. Three of the big four banks require customers to contact them to lower their direct debits, even when they’re set to the minimum.

• CBA: Customers must initiate change in direct debit

• Westpac: Automatically drops if paying the minimum + have a direct debit set up

• NAB: Customers must initiate change in direct debit

• ANZ: Customers must initiate change in direct debit

• Macquarie: Automatically drops if paying the minimum + have a direct debit set up.

Whether by request or automatically, customers are unlikely to see a change in their monthly repayments until approximately six weeks after the interest rate decision, depending on their billing cycle.

Many borrowers choose to keep repayments the same

New research released today from Australia’s biggest home loan lender, CBA, shows just 14% of its eligible customers asked the bank to reduce their direct debit to the minimum following the February cut.

While many households may not be in the position to keep repayments the same, if you can afford it, you could pay less interest charges in the long term and potentially pay off your mortgage early.

How to be mortgage-free four years sooner

Research shows if a borrower with a $600,000 debt and 25 years remaining in February, kept their monthly repayments at the same amount as they were paying at the start of the year, and there ends up being a total of four standard cash rate cuts in 2025 (one in February, May and two in the second half of this year) that are passed on in full, this borrower could potentially save as much as $89,143 in interest over the life of their loan, helping them pay off their loan four years early.

This assumes the borrower continues to make these higher repayments for the remainder of their loan.
Note: these calculations are indicative only and are based on an assumption the cash rate will remain at a neutral level of 3.35% for the remainder of the loan following the cuts, which is unlikely.

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Source: Canstar. Calculations are based on an owner-occupier paying principal and interest with a $600,000 debt and 25 years remaining on a starting variable rate of 6.32% in February 2025. Assumes mortgage rates change in line with the cash rate forecast from CBA with a total of 4 x 0.25% pt cuts in 2025, that the banks pass on the cuts in full, and that the cash rate remains at 3.35% thereafter. Assumes the borrower continues paying extra and continues to do so for the remainder of their loan.

What would relief look like for those dropping their minimum repayments?

While CBA’s research shows many borrowers are opting to reinvest the February cut back into their mortgage, some borrowers will need the relief in their bank account to pay important bills and expenses.

For an owner-occupier with a $600,000 debt today, and 25 years remaining on the loan, a cash rate cut tomorrow that’s passed on by their bank could see their minimum monthly repayments drop by $91.

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Source: Canstar. Notes: based on an owner-occupier paying principal and interest with 25 years remaining in May 2025. Calculations assume banks pass on the cut in full the following month, and that the current rate is 6.06%.

However, borrowers looking for a little more relief in the budget could do better if they switch to a lower rate lender.

Our data shows there are currently around 35 lenders offering at least one variable rate under 5.75% – even before a potential rate cut today.

If the RBA cuts the cash rate today, we estimate that there could be more than 30 lenders offering at least one rate under 5.50%.

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Source: Canstar. Notes: rates are for an owner-occupier paying principal and interest. Deposit size requirements apply. Excludes eco and intro loans.

Reduce your repayments or be mortgage free faster

Canstar’s data insights director, Sally Tindall says, “It’s been just over three years since the Reserve Bank started lifting interest rates from the record lows of 2022 and what a hard slog it has been for millions of households across the country.”

“Incredibly, the vast majority of households have managed to keep up with their mortgage repayments, and, even after relief was handed out after February rate cut, CBA’s research suggests that millions of people are opting to keep their repayments the same, which is fantastic to see.

“This just illustrates how determined Australians are to get ahead financially, particularly when it relates to a mortgage.

“Not only will paying extra in your mortgage give you a bigger buffer to fall back on, it also has the potential to release you from the shackles of the mortgage months, if not years, early.
“While plenty of Australians will be waiting with crossed fingers and toes come 2.30pm today, variable borrowers can do more than this.

“Call your bank and ask for a rate cut before the RBA hands down its decision – that way you could be in line for two cuts, rather than just one.

“It’s also well worth looking at refinancing to see if you can get a better deal. Lenders are lining up to hand out competitive rates to new customers, often ahead of existing loyal ones, so it might be time to turn yourself into a sought after commodity by making the switch.”

Cover image source: Puttachat Kumkrong/Shutterstock.com