Essential moves to make when interest rates drop
Written and accurate as at: Feb 12, 2025 Current Stats & Facts
By Vanessa Stoykov
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.
Don’t change your repayments
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.
Build 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.
Aim to have three to six months’ worth of living expenses set aside in case of unexpected events like job loss or health issues. If you don’t already have an emergency fund, now is the perfect time to start. A high-interest online savings account or offset account linked to your mortgage are good options to consider.
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.
If you’re new to investing, 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.
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, 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.
