After 13 back-to-back interest rate hikes, Aussie mortgage holders are getting some relief with the RBA starting a rate cut cycle which could continue through to the end of the year.
The cash rate has already dropped from 4.35 per cent to 3.85 per cent, with average borrowers saving around $200 a month on repayments.
With even more interest rate cuts predicted, it’s time to think about what to do with those savings.
It might not sound like much, but even an extra $100 a month over time can either quietly supercharge your finances – or disappear into your everyday spending without a trace.
To avoid the latter, here are your options:
Option 1: Keep repayments the same and smash down your mortgage
One simple option is to put the additional savings straight onto your mortgage repayments. According to Betsy Westcott, a financial advisor who is a regular on my Your Money and Your Life TV show, the long-term benefits might surprise you.
“If you can redirect those savings and get that extra money going into the mortgage, that’s going to, on average, save you about two years on your repayments,” she says. “And here’s the real kicker – you’ll save about $65,000 in interest.”
That’s a solid chunk of change over the life of your loan, and it’s money that’s no longer going to the bank. Instead, it helps you own your home sooner – a big psychological and financial win.
And while you could put that money in an offset account, Betsy has a word of warning. “We humans, we suffer with a desire for instant gratification,” she says. “If it’s sitting there available in the offset account, you’re probably going to spend it.”
Instead, she recommends sending it directly to your mortgage or into a redraw facility: “It’s just that little bit further out of reach.”
Option 2: Invest the saving for long-term returns
Of course, you could choose to invest that $100 a month instead. Over time, it could grow into something much more substantial.
“If you take that $100 and invest it for 10 years, and you get the return of the ASX over the last 20 years – which was 9.8% – in 10 years, that $100 is going to be worth more than $20,000,” Betsy says. “In 20 years, that’s going to be worth over $70,000.”
Of course, that figure doesn’t include investment fees or tax, so the real return will be a bit lower. But it still shows how even a modest monthly amount can build serious wealth over time – if you’re consistent.
So, what’s the right move?
Betsy says there’s no one-size-fits-all answer: “Some people hate debt – it gives them the heebie-jeebies – so prioritising paying off debt, if you’ve got that kind of attitude, is going to be aligned for you. The most capital-efficient solution is often going to be investing it, but it depends on your goals.”
But what about other debts?
Before you even think about investing, you’ve got to clear the decks. If you’ve got high-interest credit card debt or personal loans, that’s where your focus should be.
“Those bad boys are taking you backwards financially and fast,” Betsy says. “So if you have them, it is a really sound plan to prioritise paying them off [and] shore up your financial position in case there are other things that happen outside of your control, like job loss or an economic downturn.”
She also recommends reviewing all your debts to see if it’s worth consolidating to save on interest and simplify repayments. “Sometimes, when I’m working with clients, they’ve never actually gone and mapped out what debts they have and what the interest rate is.”
Smart ways to invest your $100
Once you’re in a good place financially, that $100 can be put to work.
“If you don’t have some emergency savings in place, that’s what I would really be focusing on,” Betsy says, adding that her emergency fund is her ride-or-die. “Redirect those funds to a high-interest savings account just to build up $1,000 to begin with, but ideally three to six months’ worth of living expenses.”
Beyond that? It depends on your timeframe and your goals.
“If it’s short term – one to three years – you’re going to be putting money in a high interest savings account. If it’s something a bit more medium or long-term, you might look at things like exchange-traded funds, managed funds or building a modest share portfolio.”
The key, she says, is to match the investment to your goal: “When do I plan to spend this money? What’s the purpose of this money? That will help you select the appropriate vehicle.”
Betsy’s golden rule?
“Practise engaging with your finances like it’s a self-care activity, and make sure you’ve got that safety net in place and the skills to grow wealth.”
I reckon that’s sound advice. It doesn’t matter if you’re paying down your mortgage or investing for the future – $100 a month might not sound like much, but it’s what you do with it that counts.
