3 smart ways to use your rate cut savings

August saw the third rate cut for 2025, and it will help dial down the financial pressure facing many households.

Vanguard estimates that the 0.25% rate cut will shave about $91 off monthly repayments on a $600,000 mortgage with a 25-year loan term. This assumes the loan rate has dropped from 5.8% to 5.55%.

The trouble is, $91 each month in additional disposable income can pretty easily get swallowed up in regular spending.

It's possible to get a lot more bang for your rate cut buck by actively putting the savings to work.

Here are three possible strategies to make your money work harder.

I'll be sticking with the $91 per month saving mentioned earlier, but the same principles apply regardless of your loan size or repayment drop.

Option 1: Pay off the mortgage

Lenders have generally been quick to cut 0.25% from their variable rates following the Reserve Bank's August rate decision. Homeowners, however, may be in less of a hurry to reduce their repayments.

The Commonwealth Bank, Australia's largest home loan lender, says only 10% of eligible home loan customers reduced their mortgage repayments following the May interest rate cut.

That's not a bad thing. Keeping your loan repayments at the old (pre-rate cut) level is a simple way to pay off your mortgage sooner, and pocket decent savings on long-term interest costs.

As a guide, on a $600,000 loan, the August rate cut would see monthly repayments fall from $3,793 to $3,702.

Vanguard's calculations show that keeping the repayments unchanged at $3,793 would reduce the loan balance to $587,464 after one year - that's $1,119 less than if a borrower chooses to reduce their repayments.

Keep up the higher repayments for five years, and the outstanding balance would be whittled away to $529,767 - an impressive $6,267 less than if the borrower had scaled back their repayments.

It might not seem like a lot, but by lowering the loan principal this way, there are big savings to be made on loan interest. For the relatively minor $91 extra paid each month, a borrower could clear the debt 15 months ahead of schedule and save almost $30,000 in overall interest.

It's a great result for a strategy that involves essentially taking no action at all.

Option 2: Invest in the share market

Maybe you're more interested in using the savings on home loan repayments to grow a portfolio of investments. How could this strategy shape up?

While past returns are no guide for the future, let's assume an investor could earn 8.0% annually on Aussie shares - that's the average for the S&P ASX All Ordinaries Total Return Index over the past 20 years to 30 June 2025.

Assuming an initial investment of $91, followed by monthly investments of $91, an investor with broad exposure to Australian shares (which an ETF can provide) could accumulate a portfolio worth:

• $1,231 after one year
• $6,822 after five years
• $87,211 after 25 years

Clearly, over 25 years, an investor will earn a lot more investing in the share market than they will save on home loan interest.

Bear in mind, though, these calculations assume all income payments, such as dividends or ETF distributions, are reinvested. This takes discipline.

The results also overlook the impact of personal taxes, investment management fees, brokerage, buy-sell spreads or any other fees and costs, all of which have the potential to reduce the long-term gains. Still, the potential rewards make it a compelling strategy.

Option 3: Eliminate credit card debt

According to credit reference agency Equifax, we're seeing a surge in demand for personal credit. The June 2025 quarter saw a 13.4% jump in demand for credit cards, which Equifax says could be a sign that consumers are struggling to manage their money.

What's worrying about this is that credit cards are one of the most expensive forms of consumer debt.

The average card rate is currently a hefty 18.74% - a rate that has increased since the Reserve Bank began lowering the cash rate in February.

Could savings on your home loan help you save on card debt? Absolutely.

Sticking to the minimum repayments for a $4,500 credit card balance with a rate of 18% could see you paying down the debt for close to 33 years.  

This assumes no additional card purchases (a big assumption) and by the time the card is finally paid off, the interest bill would have hit $11,362. 

It works this way because the card issuer may only ask you to pay down 1.5% to 2.0% of the card balance each month. Yet the debt is accruing interest at 18%. This being the case, the only way to clear the slate sooner - and by definition save a bundle in interest - is to pay more than the minimum.

In this example, the minimum repayment would be $90. If you added the $91 saved each month on the mortgage to that and paid $181 in total each month, you could clear the credit card debt in just two years and seven months. The interest charge would drop to $1,067 - a saving of $10,295.

What's the 'best' strategy?

As always, there's no single strategy that comes up trumps for everyone. It comes down to looking at your own circumstances and deciding what works best for you.

If you're carrying a big credit card debt, the reduction in mortgage repayments offers a golden opportunity to get ahead clearing the debt - especially if you resist the urge to reload a cleared card with fresh purchases.

If you're a mortgage holder, simply keeping your repayments unchanged is an effortless, low-cost strategy to pay down the balance sooner and build equity that can be put to work for other purposes.

Alternatively, the newfound extra cash you have each month could be a great opportunity to grow a share-based investment portfolio.

Of course, this will be driven by how you feel about risk. Paying down a home loan or credit card delivers guaranteed savings on interest. Returns on equities are never set in stone.

The main point is to look for smart ways to get more from your rate cut savings. From adding to your super, or starting a savings plan for the kids, there is a wealth of choices to pick from. With a consistent approach, a 0.25% rate cut could make a real difference to your financial wellbeing. 

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