What the latest rate cut means for your mortgage payments

The Reserve Bank of Australia (RBA) has cut the cash rate by 25 basis points to 3.85%, delivering potential relief for mortgage holders. However, questions remain over when - and if - the banks will pass on the cut.

The decision, which follows a pause in April, is the second rate cut since November 2020, continuing the RBA's easing cycle that began in February.

It comes as inflation eases within the RBA's target of 2%-3%, with the Consumer Price Index (CPI) rising 0.9% in the March quarter and 2.4% annually, according to the Australian Bureau of Statistics (ABS).

To understand how the RBA controls inflation through the cash rate, click here.

Economists saw it coming. A Finder survey showed 88% correctly tipped the cut, and the Commonwealth Bank even called it a 'done deal' before the announcement.

How much will you save?

For homeowners with a mortgage, the cut could mean real savings. On an average owner-occupier home loan of $659,920, a 25-basis point reduction could save $213 a month or $2553 a year if lenders pass it on in full.

And it might not stop there. Finder's survey found 73% of experts expect two or more rate cuts in the next 12 months. If another 50 basis points are cut, homeowners could save $420 a month and $5,044 a year on the average loan.

"Frankly, two cuts might not be enough to ease the spike in mortgage stress we've seen since May 2022. But it's a step in the right direction," says Graham Cooke, head of consumer research at Finder.

With thousands of dollars on the line for the average homeowner, Cooke says rate changes show the value of being on a lower rate, even if it is just a bit lower.

However, he says many could give themselves the equivalent of nearly two rate cuts right now simply by "getting on the front foot and switching".

Canstar.com.au shows there were around 35 lenders offering at least one variable rate under 5.75% - even before the rate cut.

"There is a 40-point difference between the average and lowest rate available."

Will your bank pass on the cut?

Of course, these savings depend on your lender. Canstar's analysis shows a $600,000 mortgage could see repayments fall by $91 per month - but only if banks pass on the cut.

Not all do it automatically. CBA NAB and ANZ customers must initiate a change to their direct debit payment for it to reflect the potentially passed on lower rates.

For Westpac and Macquarie Bank customers, the change automatically drops if they are paying the minimum and have a direct debit set up.

Some smaller lenders, like Bank of Queensland Specialist and Virgin Money, received criticism after not passing on the rate cuts in February.

"The real question is - will the banks play fair?" says Mozo's finance expert Rachel Wastell. "History shows they can be a bit stingy on the second cut, as during the last cycle, we saw pass-through rates shrink dramatically as the cuts went on."

"For homeowners, it's a bit of a waiting game, as lenders can take up to two weeks to make their move, and not all will pass it on in full."

Wastell says banks will also likely start punishing savers before they reward borrowers by cutting deposit rates on savings accounts first. She recommends keeping an eye out for the underdogs.

"In the home loan space, it's the smaller lenders that have been leading the charge with competitive rates while the big four lag behind."

Should you keep your repayments the same?

Even if your bank passes on the cut, keeping repayments steady can pay off. CBA data shows just 14% of eligible customers reduced their payments after February's cut, meaning millions of Australians had opted to keep their repayments the same.

"This just illustrates how determined Australians are to get ahead financially, particularly when it relates to the mortgage," says Sally Tindall, Canstar's data insights director.

"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."

Canstar.com.au 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.

This could help them pay off their loan four years early. However, this assumes the borrower continues to make these higher repayments for the remainder of their loan.

What's next?

While today's cut is welcome news for mortgage holders, it could spell lower returns for savers. The RBA's next meeting on July 7-8 will be closely watched.

For homeowners, now may be the time to be proactive - check your rate, consider refinancing, and decide if maintaining higher repayments is right for you.

To get a sense of whether you could benefit from refinancing, take Moneysmart's mortgage switching calculator for a spin.

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