Why Investing Extra Money from a Rate Cut Can Be a Smarter Long-Term Strategy…
Millions of Australians with variable-rate mortgages are about to see a welcome boost to their household budgets, following the Reserve Bank’s 0.25% cash rate cut on 20 May.
For a $600,000 mortgage with 25 years remaining, a drop from 6.00% to 5.75% lowers monthly repayments by $91. When combined with the February rate cut, homeowners now have an extra $183 each month compared to the beginning of the year.
What Should You Do with the Savings?
How you use this freed-up cash depends on several factors: your financial goals, risk appetite, liquidity needs, outstanding debt, and overall loan servicing costs.
You might ask: Should I make extra mortgage repayments to reduce interest and pay off my loan faster? Or would investing the money in growth assets, like shares, deliver better long-term returns?
The Case for Higher Mortgage Repayments
Let’s say you keep your mortgage repayments at the pre-cut level of $3,958 per month—what they were when the interest rate was 6.25%.
By maintaining that amount instead of reducing payments to $3,775 (now aligned with the 5.75% rate), you could:
Cut your total interest payable from $587,412 to $473,084
Shorten your loan term from 25 years to 22 years and 8 months
Save $114,328 in interest over the life of the loan
The Case for Investing in Growth Assets…
Now, consider investing that $183 per month instead.
Using the Australian share market’s 25-year average return of 8.2% annually (from April 2000 to April 2025), a monthly investment of $183 could grow to $181,214 over 25 years. This assumes reinvested earnings and excludes fees and taxes.
That’s $66,886 more than the total interest you’d save through higher mortgage repayments.
One way to access similar returns could be through low-cost, broad-market ETFs like the Vanguard Australian Shares Index ETF (VAS), which tracks the top 300 stocks on the ASX.
The Bottom Line
There’s no one-size-fits-all answer. Whether you repay your mortgage faster or invest instead hinges on your personal goals, risk tolerance, tax situation, and how much flexibility you want.
Offset accounts—popular in Australia—offer a hybrid approach, reducing interest while keeping funds liquid. As of now, over $300 billion sits in these accounts nationwide.
While historical data shows potential benefits to investing, keep in mind:
Past performance doesn’t guarantee future results
Share market returns can be volatile
Investment gains may be subject to capital gains tax
Mortgage rates will likely fluctuate over time, impacting repayment outcomes
Rick Maggi, Financial Advisor Perth, Westmount Financial
Notes:
Mortgage calculations conducted using ASIC’s Moneysmart mortgage calculator. Mortgage calculator - Moneysmart.gov.au
Investment calculations conducted using the Vanguard Digital Index Chart calculator set between 1 April 2000 and 30 April 2025. Vanguard Index Volatility Charts
Compound interest calculations conducted using ASIC’s Moneysmart compound interest calculator. Compound interest calculator - Moneysmart.gov.au
Disclaimer
This document has been carefully prepared by Westmount Securities Pty Ltd (ABN 42 090 595 289, AFSL 225715) for general information purposes only. However, neither Westmount Securities Pty Ltd nor any of its affiliates guarantee the accuracy or completeness of any statements contained herein, including any forecasts. It is important to note that past performance is not a reliable indicator of future outcomes. This material does not consider the specific objectives, financial circumstances, or needs of any particular investor. Therefore, before making any investment decisions, investors should assess the relevance of this information to their individual situation and consult professional advice, taking into account their unique objectives, financial position, and needs.