How to prepare for lower interest rates

Many economists are predicting rate cuts in early 2025, so what moves can mortgage holders and savers make to prepare?

In early November last year the Reserve Bank Board lifted the official cash rate by 25 basis points to a 12-year high of 4.35%. Seven meetings and seven rate holds later, the cash rate remains unchanged.

For its part, the Reserve Bank Board is continuing to vocalise a cautious approach, warning punters in the post-meeting statement which followed its September meeting that inflation remained 'persistent' and that the 'outlook remains highly uncertain' going forward.

Noting the Reserve Bank's stance, it's fair to say that other economists and experts appear to be a bit more optimistic - at least, when it comes to the prospect of a rate cut in the near future.

So after 13 rate hikes in the last two and half years, could there be the feint glimmer of lower interest rates somewhere on the horizon?

Read on for an overview of what some experts are forecasting on the rate cut front, as well as the action homeowners and savers might want to think about taking to prepare.

When could interest rates go down?

While the Reserve Bank is being understandably cautious on the future direction and timing of any change to the cash rate, there's been no shortage of forecasting and speculation from others.

In a recent survey of economists and experts conducted by comparison website Finder, 44% of the 34 respondents said that they believe that the RBA Board will cut rates at the first meeting of 2025 in February. That was followed by May (15% of respondents) as the second most popular choice.

The outlook from Australia's four largest banks is similar. ANZ (February 2025), the Commonwealth Bank (December 2024), NAB (February 2025) and Westpac (February 2025) are all currently forecasting that the Reserve Bank will make its first move to lower rates at some point in the next six months.

However, its worth noting that many of these forecasts are based on assumptions around inflation data, including the September quarter Consumer Price Index which is set to be released by the Australian Bureau of Statistics on October 30.

"Should the headline results and general composition from the data print broadly as we expect, we view the inflation dynamics as being most consistent with a February start to the rate cutting cycle," economists at Westpac wrote in a recent economic update published by the bank.

A deluge of fixed rate cuts

While the official cash rate has remained steady, that's not been the case for home loan rates. Financial comparison website Mozo, for one, has recorded a significant number of fixed home loan rate cuts in recent months.

"In September there were over 200 fixed rate cuts and in October the cuts don't seem to be slowing down, with 135 so far," says Rachel Wastell, personal finance expert at Mozo.

"Median fixed rates in the Mozo database for two and three-year terms are now under 6%, with the two-year median fixed rate at 5.99% p.a. and the three-year median rate at 5.97% p.a. This reflects the trend of cuts we've seen over recent months, with competition heating up to lock in borrowers."

This flurry of rate cuts from lenders is no coincidence either, Wastell says.

"These fixed rate reductions reflect the banks' expectations about future cash rate movements, and it seems they are strategically positioning themselves to attract borrowers.

"However, the banks are also mindful they may need to pass on any future RBA cuts to variable mortgage rates if the RBA lowers the cash rate during those fixed rate terms, so borrowers should consider their options carefully."

Wastell notes that there's been very little movement from lenders on the variable rate front, but suggests that this would quickly change if the Reserve Bank was to reduce the cash rate.

What can mortgage holders do to prepare for lower rates?

The reality is that most mortgages are on a variable rate, so what should homeowners in this situation be thinking about before a possible rate cut in the coming months?

"Mortgage holders should be keeping an eye on their home loan rates, as we found earlier this year that a whopping two in five don't know the interest rate they're on," Wastell says.

"If you don't know your rate, you'll be blind to whether you can save money on your repayments. With home loans because they're such big debts the smallest percentage difference can equate to thousands of dollars difference over the course of the loan."

For borrowers on a fixed rate loan - especially one that's expiring soon - Wastell recommends scouting other offers on the market as, in all likelihood, there will be better value elsewhere than whatever rate the loan is rolled on to.

"If you're considering a fixed rate again - but aren't sure it will pay off - you could also consider splitting your loan so you benefit from the fixed rates on offer now and any future cuts to variable rates," Wastell says.

Going forward, if lenders do begin beginning passing on meaningful rate cuts, borrowers may also want to consider maintaining their current repayment levels - even if their lender lowers their rate.

Given the current levels of mortgage stress many are experiencing, this won't be an option for everyone, but for those who can afford it, it can be a way to pay off the loan faster and reduce the interest paid.

How can savers prepare for lower rates?

Australians with a mortgage may be cheering on the prospect of lower repayments in the future, but savers are unlikely to be thrilled about the prospect of diminished returns on their savings. So, given that, is it worth considering locking away money in an account like a term deposit?

"Term deposit rates are being cut across the board, so leading rates you see today may not hold at their current levels for much longer," Wastell explains.

"If you're thinking about locking in a term deposit to secure a guaranteed rate, you may want to do it sooner rather than later. However, savers need to be aware that term deposits have hefty penalties for withdrawing funds before the term ends."

Because of their variable nature, interest rates on savings accounts are naturally more vulnerable to any future cash rate changes.

Wastell says that this makes it all the more important for savers to get the highest rate they can with an account that suits their needs.

"For those with online savings accounts, it's definitely worth shopping around for the highest available savings rates, as these tend to remain competitive even when term deposit rates start dropping. On the Mozo database there are still a number of bonus rates at that 5.50% mark.

"But be mindful - once the RBA starts cutting, banks are likely to reduce savings rates quickly, and you also typically need to jump through a number of hoops to get the high bonus rates."

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