What is the official cash rate?
The official cash rate is the interest rate banks pay when they borrow money from each other overnight.
While you won't borrow at the cash rate yourself, it influences interest rates across the economy. This includes home loans, savings accounts and other lending products.
That's why borrowers, homeowners and investors pay close attention to every RBA cash rate decision.
Who decides the official cash rate?
The RBA Monetary Policy Board decides the official cash rate.
Before each decision, the Board reviews what's happening in the Australian economy. It looks at inflation, employment, consumer spending and global economic conditions before deciding whether interest rates need to change.
Why does the RBA change the cash rate?
The RBA changes the cash rate to help keep inflation under control and support the economy.
If inflation rises too quickly, the RBA may raise the cash rate. Higher interest rates make borrowing more expensive, which can reduce spending.
If inflation slows or the economy loses momentum, the RBA may lower the cash rate. Lower interest rates make borrowing cheaper, which can encourage people and businesses to spend and invest.
A change to the cash rate can influence home loan rates, but it doesn't automatically change your mortgage interest rate. Your lender decides whether to pass on an RBA rate change.
Cash rate vs mortgage interest rate: What's the difference?
The official cash rate and your mortgage interest rate are different.
The RBA sets the official cash rate to influence interest rates across the economy. Your bank or lender sets your mortgage interest rate, which is the rate you pay on your home loan.
While the cash rate influences home loan rates, it doesn't control them. Your lender decides whether to change your mortgage rate after an RBA cash rate decision.
Does the cash rate determine your mortgage interest rate?
No. The cash rate influences mortgage interest rates, but your lender decides how much interest to charge on your home loan.
When the RBA raises or lowers the cash rate, some lenders pass on the full change to borrowers. Others may pass on only part of the change or keep their rates the same.
That's why two borrowers with similar home loans can pay different interest rates, even when the official cash rate is the same.
Why do different banks charge different mortgage rates?
Every lender sets its own interest rates based on a range of factors, including the cash rate, funding costs and competition.
Some lenders may lower rates to attract new customers, while others may keep rates higher as part of their pricing strategy. That's why it pays to compare home loans rather than assume every lender offers the same rate.
How does an RBA cash rate decision affect your mortgage?
An RBA cash rate decision doesn't automatically change your home loan interest rate. Instead, it sets off a chain of events that can eventually affect your mortgage repayments.
Here's what usually happens:
1. The RBA announces its cash rate decision
The RBA raises, lowers or leaves the official cash rate unchanged to help manage inflation and support the Australian economy.
2. Banks review the decision
Banks consider the RBA's decision alongside their own funding costs, market conditions and business strategy. They then decide whether to change their home loan interest rates.
3. Lenders announce any rate changes
If a lender decides to change its rates, it lets customers know when the new rate will take effect. Some lenders pass on the full RBA change, while others may pass on only part of it or none at all.
4. Your home loan rate may change
If you have a variable-rate home loan, your interest rate may go up or down. If you have a fixed-rate loan, your interest rate will usually stay the same until your fixed term ends.
5. Your repayments may change
If your lender changes your variable home loan rate, your mortgage repayments may also change. Depending on your loan, the lender may automatically adjust your repayments or give you the option to keep paying the same amount and pay off your loan sooner.
How long does it take for banks to pass on a cash rate change?
There's no set timeline.
Some lenders announce changes on the same day as the RBA decision, while others take a few days. Even after a lender announces a new rate, it may not take effect immediately.
If you have a variable-rate home loan, your lender will usually tell you when your new interest rate and repayments will start.
What is the serviceability buffer, and is it affected by the cash rate?
Not directly. The serviceability buffer is an additional margin that lenders add to your home loan interest rate when assessing your borrowing capacity. While the buffer itself doesn't change with the RBA cash rate, the assessment rate usually does because it's calculated by adding the buffer to your home loan interest rate.
For most borrowers, lenders use an assessment rate that's 3 percentage points above the home loan interest rate. So, if your lender changes your mortgage rate after an RBA cash rate decision, your assessment rate will generally move by the same amount.
Why doesn't your mortgage rate always change when the cash rate changes?
Many borrowers expect their home loan rate to rise or fall by the same amount every time the RBA changes the cash rate. But that's not always the case.
The cash rate influences home loan rates, but it doesn't set them. Every bank and lender decides whether to change its rates and by how much.
You can track whether your lender has moved on Bheja.
Why don't banks always pass on the full RBA rate change?
The cash rate is only one factor lenders consider when setting home loan interest rates. They also look at:
- Funding costs: Banks borrow money from different sources, and those costs don't always move with the cash rate.
- Customer deposits: Deposits are an important source of funding, and the interest banks pay on savings accounts can affect their costs.
- Competition: Lenders may lower rates to attract new customers or keep rates steady to protect their business.
- Business strategy: Each lender has its own approach to pricing home loans.
For example, if the RBA cuts the cash rate by 0.25%, one lender may pass on the full cut, another may reduce rates by 0.15%, while another may leave its rates unchanged.
Can banks change mortgage rates without the RBA?
Yes. Banks and lenders can change their home loan interest rates even if the RBA leaves the cash rate unchanged.
For example, a lender may increase rates because its funding costs have risen or reduce rates to stay competitive.
That's why it's worth reviewing your home loan regularly, not just after an RBA cash rate decision. If your interest rate is no longer competitive, you may be able to negotiate with your lender or refinance to a better deal.
What does a cash rate change mean for borrowers?
A cash rate change can affect more than just your home loan interest rate. It can also influence how much you can borrow, your monthly repayments and even the property market.
How does the cash rate affect your mortgage repayments?
If your lender changes your variable home loan rate, your mortgage repayments may increase or decrease.
For example, if your lender passes on an RBA rate cut in full, your monthly repayments could fall. If it passes on a rate rise, your repayments could increase.
The exact impact depends on your loan amount, interest rate and remaining loan term.
Does the cash rate affect how much you can borrow?
Yes, it can.
When interest rates rise, lenders may reduce your borrowing capacity because higher repayments make it harder to service a larger loan.
When interest rates fall, your borrowing capacity may improve. However, your income, living expenses, existing debts and the lender's lending criteria will also affect how much you can borrow.
Does the cash rate affect house prices?
The cash rate can influence the property market, but it doesn't directly determine house prices.
Lower interest rates can make borrowing more affordable and increase buyer demand, which may support property prices. Higher interest rates can reduce borrowing power and slow demand, which may put pressure on prices.
House prices also depend on factors such as housing supply, population growth, employment and buyer confidence.
Example questions to ask Bheja, your AI mortgage assistant:
- How much will my repayments change if the RBA announces a 0.50% hike?
- How much will my repayments change if the RBA announces a 0.50% cut?
What should you do after an RBA cash rate announcement?
An RBA cash rate announcement is a good opportunity to review your home loan. Whether the cash rate goes up, down or stays the same, a few simple checks can help you make sure you're still getting a competitive deal.
Here's what you can check:
- Check whether your lender has changed your interest rate.
- Find out when any rate change takes effect.
- Review your repayments and household budget.
- Compare your interest rate with similar home loans on the market.
- If your rate isn't competitive, ask your lender for a better deal or consider refinancing.
Should you refinance after a cash rate change?
A cash rate change doesn't always mean you should refinance. But it can be a good time to compare your home loan with what's available in the market.
Refinancing may be worth considering if:
- You're paying a higher interest rate than similar borrowers.
- Your fixed-rate term is ending.
- Your current loan no longer suits your needs.
- Another lender offers a better combination of rate, fees and features.
Before switching lenders, compare the total cost of the loan, including interest rates, fees and features, to make sure refinancing will leave you better off.
