Seize the savings: Smart moves to make when interest rates fall

On February 18, 2025, the Reserve Bank of Australia (RBA) reduced the official cash rate by 0.25% points, bringing it down to 4.1%.

This marks the first rate cut since November 2020, prompted by a decline in core inflation to 3.2% in the fourth quarter of 2024.

When interest rates drop, it often sparks excitement, as people start thinking about lower repayments, cheaper loans, and extra cash flow. While it’s tempting to pocket the savings and treat yourself, a drop in interest rates presents an incredible opportunity to make smarter financial decisions that can set you up for the future.

Interest rates are a key lever in the economy, and changes impact everything from your mortgage to your savings. If you play your cards right during a period of low rates, you can turn this into a financial win that pays off in the long term. Here’s how to be smart and get ahead.

CONSIDER KEEPING YOUR REPAYMENTS AS THEY ARE

If you’re paying off a mortgage, keeping your repayments at the same level when rates drop is one of the smartest moves you can make.

Why? Because every extra dollar you pay above your minimum repayment goes directly toward reducing the principal amount. This reduces the overall interest you’ll pay in the long term and helps you pay off your loan faster.

For example, if your home loan interest rate drops from 6% to 5%, calculate your new minimum repayment but continue paying the old amount. That difference, which you were already used to paying, will work harder for you by chipping away at your debt.

CONSIDER BUILDING AN EMERGENCY FUND

Lower interest rates often mean lower returns on savings accounts, but this doesn’t mean saving becomes any less important. Use the extra cash flow from lower loan repayments or other expenses to bolster your emergency fund.

Aiming to have three to six months’ worth of living expenses set aside in case of unexpected events like job loss or health issues can be a good strategy for many people. If you don’t already have an emergency fund, now is the perfect time to consider starting onestart.

REASSESS YOUR DEBTS

A drop in interest rates is the perfect time to review all your debts and see where you can save even more money. Look at credit cards, personal loans, or car loans. If the rates on these debts haven’t decreased in line with broader rate cuts, it may be worth shopping around for a better deal.

Debt consolidation can also be a smart move. By rolling high-interest debts into a single, lower- interest loan, you can save on interest payments and streamline your finances.

INVEST STRATEGICALLY

Low interest rates can be a double-edged sword for savers. On one hand, borrowing becomes cheaper, but on the other, returns on cash and term deposits may decline. This is a good time to think strategically about investing, you may wish to consider diversifying investments into other more growth oriented asset classes like shares.

If you’re new to investing, you might want to start with small amounts and diversify your portfolio. Low-cost exchange-traded funds (ETFs) or superannuation contributions can offer good growth potential over time. Remember, investing comes with risks, so make sure you’re comfortable with your risk tolerance and do your research or seek financial advice.

CONSIDER REFINANCING

With lower rates, refinancing your mortgage or loans can lead to significant savings. Lenders often compete aggressively for new customers when rates drop, so you may find an attractive offer with lower fees or a better interest rate. Before refinancing, check for any exit fees on your current loan and calculate whether the savings from switching outweigh the costs. Use tools available online to compare rates and ensure you’re getting the best deal.

SUPERCHARGE YOUR SUPER

Lower rates can also mean reduced returns for retirees and those close to retirement. If you’re still working, consider making extra contributions to your superannuation. Even small amounts can make a big difference due to the power of compounding interest.

There are strict rules around contributing to superannuation and the tax you’ll pay, so please talk to a financial adviser if you are unclear about those rules and how they impact you.

PREPARE FOR THE FUTURE

Interest rates don’t stay low forever, so now is the time to think ahead. If you’re enjoying lower repayments, consider using use this time to create a buffer for when rates inevitably rise again.

Whether it’s saving extra in an offset account or paying down your debts faster, small actions now can protect you in the future.

EDUCATE YOURSELF

Take this opportunity to build your financial knowledge. Whether it’s understanding how interest rates impact your investments, learning about property markets, or brushing up on your retirement planning, education is key to staying ahead.

MAKE LOW RATES WORK FOR YOU

Periods of low interest rates can feel like a relief, but they’re also a unique opportunity to get ahead financially. By being intentional with your extra cash flow, you can reduce debt, build wealth, and prepare for the future.

Remember, the smartest financial decisions often require discipline and planning. Use this time to take control of your money and set yourself up for long-term success.

Your Vision Financial Solutions Pty Ltd ABN 64 650 296 478 and its Advisers are Authorised Representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306. This article has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information on this article you should consider the appropriateness of the information having regard to your objectives, financial situation and needs.