Why Most Borrowers Are Choosing to Stay Ahead Despite Rate Cuts.

The recent Reserve Bank of Australia rate cuts have provided welcome relief to Australian mortgage holders, but the numbers reveal a surprising trend that speaks volumes about borrower behaviour and financial strategy.

The Numbers Don't Lie

Despite the RBA's series of rate cuts – 25 basis points in February, another 25 basis points in May, and most recently a further 25 basis points in August bringing the cash rate to 3.6% – only 10% of variable rate customers chose to reduce their mortgage repayments according to recent Commonwealth Bank data following the May cut. This figure was actually lower than the 14% who reduced payments following the February cut, suggesting an increasingly conservative approach among borrowers.

With the August cut being the most recent, early indicators suggest this trend is continuing, with the vast majority of borrowers maintaining their pre-cut payment levels despite now having experienced three consecutive rate reductions totalling 75 basis points.

The trend isn't isolated to CBA. National Australia Bank reports that more than 90% of their borrowers kept repayments unchanged following previous cuts, while ANZ noted that just 10% of customers opted to reduce their repayments following the February rate cut. Even Westpac, the only major bank that automatically reduces repayments to the new monthly minimum unless customers opt to pay extra, sees most customers maintaining higher payment levels.

The Financial Impact of Staying the Course

The decision to maintain pre-cut payment levels delivers substantial long-term benefits, and these benefits have become even more significant with the August rate reduction. Canstar's updated modelling shows that homeowners who keep their repayments unchanged following all three rate cuts (February, May, and August) could now shave approximately 2.5 years off a 25-year mortgage term.

The interest savings are equally compelling. On a $500,000 mortgage, borrowers who maintain their original payment levels could save approximately $55,000 in interest over the loan term, while those with a $1 million loan could save an impressive $110,000. These updated figures assume borrowers maintain the same payment levels they had before any of the cuts.

Should rates fall another two to three times this year as some economists continue to predict, the benefits become even more pronounced. Homeowners maintaining steady repayments could potentially cut their loan terms by up to six years, saving over $90,000 on a half-million-dollar loan or $180,000 on a million-dollar mortgage.

Regional and Demographic Patterns

The data reveals interesting regional variations in borrower behaviour. NSW borrowers accounted for 39% of those who opted to lower payments – the highest proportion nationwide – followed by Victoria at 31%. This pattern likely reflects the higher property prices in these states, where borrowers may feel more pressure to free up cash flow, particularly as cost-of-living pressures persist.

Age demographics also play a role, with borrowers aged 31-50 representing 66% of those who reduced repayments. This cohort often faces significant financial pressures from family expenses and household costs, making the appeal of lower monthly payments more compelling. Investment loan holders were also more inclined to adjust payments compared to owner-occupiers.

The Banking Perspective

Interestingly, not all banks automatically lower minimum repayments after a rate cut. CBA, NAB, and ANZ require customers to actively request payment reductions, even if they're paying the minimum. This approach, while requiring customers to take action, inadvertently encourages borrowers to pay extra into their loans – a trend that has become more pronounced with each successive rate cut.

Westpac stands alone among the major banks by automatically reducing repayments to the new monthly minimum unless customers have specifically opted to pay extra. However, even with this automatic adjustment, Westpac reports that the majority of their customers continue to make additional payments above the reduced minimum.

A Strategic Approach to Mortgage Management

The trend toward maintaining higher repayments reflects a sophisticated understanding of mortgage economics among Australian borrowers. With three rate cuts now in place, this "pre-payment story" goes hand in hand with the rising use of mortgage offset accounts, indicating borrowers are employing multiple strategies to get ahead on their loans.

The strategy makes particular sense in the current environment. With borrowers saving approximately 80 cents to a dollar of any improvement in their financial position, and new borrowing activity remaining relatively subdued, existing borrowers continue to demonstrate conservative financial management. Many are viewing the current rate environment as an opportunity to build equity faster rather than increase spending.

Looking Ahead

As the RBA continues to navigate economic conditions, with the cash rate now at 3.6% following the August cut, many economists are watching for signals about future monetary policy direction. Should additional rate reductions materialise, the current data suggests most borrowers will likely continue their strategy of maintaining higher repayments to build equity and reduce long-term interest costs.

For mortgage holders contemplating their next move, the mathematics are clear: maintaining current repayment levels in a falling rate environment delivers significant long-term benefits through reduced loan terms and substantial interest savings. The August rate cut has only strengthened this proposition, offering borrowers an even greater opportunity to accelerate their mortgage paydown.

The Broker's Perspective

As mortgage brokers, we're seeing this trend firsthand in our client conversations. The August rate cut has prompted many borrowers to reassess their strategy, and we're finding that most are choosing to pocket the rate savings by maintaining their current payment levels rather than reducing their monthly commitment.

This approach is particularly wise given the current economic uncertainty. By maintaining higher repayments, borrowers are building a buffer against potential future rate rises while simultaneously reducing their overall debt burden.

However, individual circumstances vary significantly. Some clients may benefit from redirecting the savings into high-interest debt reduction, emergency funds, or other investments. The key is having a strategy that aligns with your personal financial goals and circumstances.

Conclusion

The trend reveals Australian borrowers are taking a long-term view of their mortgage obligations, prioritising financial security and debt reduction over short-term cash flow improvements. With three rate cuts now providing significant relief, and the potential for more to come, this conservative approach may prove to be the wisest strategy of all.

For borrowers considering their options following the August rate cut, the opportunity to significantly reduce loan terms and interest costs has never been more compelling. Speaking with a qualified mortgage broker can help you determine the best strategy for your individual circumstances and financial goals.

This information has been prepared by PHA Financial Services and does not take into account your objectives, financial situation or needs. Before acting on this information you should consider whether it is appropriate to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. The information provided was accurate at the time of publication and changes in circumstances after a document is published may impact on the accuracy of information. Some information may have been collated from various third parties and we make no assertion that the information was originally ours.