For a while there, Aussie homeowners braced themselves every time the Reserve Bank of Australia (RBA) made an announcement. Since early 2022, nearly every update brought with it another interest rate hike - and another hit to the hip pocket.
But the tide is finally turning.
At the beginning of this year, we saw the first glimmer of relief as the cash rate dipped from a year-long freeze at 4.35% down to 4.1%. Now, in the latest move, the RBA has lowered it again - to 3.85%. That’s the first time we’ve seen it drop below 4% since 2023.
If you’ve got a mortgage, you’re probably breathing a sigh of relief. Or, if you’re looking to buy your first home, you might be wondering what this all means. Let’s break it down.
What is the Reserve Bank of Australia?
The RBA has been around since 1960 and acts as Australia’s central bank. It operates independently of the government, with the main mission of keeping the economy stable and healthy.
A big part of that role involves keeping inflation in check. Ideally, inflation rises gradually - around 2–3% per year - alongside wage growth. The RBA also monitors the strength of the Aussie dollar and, of course, sets the cash rate. The cash rate influences all other interest rates, including mortgage and deposit rates.
What are interest rates, anyway?
Interest rates directly affect how much it costs banks and lenders to borrow money.
When the RBA raises the cash rate, borrowing becomes more expensive for banks, and they typically pass that cost on to customers by increasing interest on loans and mortgages. When the RBA lowers the cash rate, it’s cheaper for banks to borrow, and those savings can be passed on to consumers through lower loan interest rates.
So while you don’t borrow directly from the RBA, changes to the cash rate ripple through the system and influence how much interest you pay - or save - on everything from your home loan to your credit card.
How Interest Rates Affect Your Borrowing Power
If you’re looking to buy or build your first home, interest rates can play a big role in how much a lender is willing to let you borrow.
While banks aren’t legally required to follow the RBA’s moves, most do. When the cash rate goes up, borrowing becomes more expensive for them - so they tend to pass that cost on to borrowers. This usually means higher loan interest rates and tighter lending criteria.
In practical terms, that can reduce your borrowing power. Lenders reassess your income, expenses, and how much risk they're comfortable taking on, especially if more rate hikes are expected. That could mean a smaller loan offer, potentially putting your ideal property out of reach.
When the rate drops, as it just has, lenders may become more flexible. You might be able to borrow a little more - but there’s no guarantee. It all depends on how individual lenders respond to the change.
And if things don’t quite go to plan, our partners at Mortgage Domayne are always here to help you explore your options and navigate the next steps with confidence.
How Interest Rates Affect Your Mortgage Repayments
Even if you’ve already secured your spot on the property ladder, changes to the cash rate still have an impact.
If you’re on a fixed-rate mortgage, your repayments stay the same for the duration of your fixed term. That can be a win when rates are climbing, but if rates fall - as they just have - you won’t see any benefit until your fixed term ends.
If you’ve opted for a variable-rate loan, your repayments move with the market. When the RBA cuts the cash rate, lenders often lower their interest rates in response, which can reduce your monthly repayments. If the rate rises, the opposite is true - your repayments may increase.
Take the latest drop as an example: with the cash rate down by 0.25% to 3.85%, the average mortgage on a $660,000 loan could see monthly repayments fall by around $213, or $2,500 a year, according to Nine News. That’s money back in your pocket.
Whether you're already paying off a home or preparing to buy, movements in the RBA cash rate can directly affect your bottom line - they impact your budget, your borrowing power, and your financial future.
Keen to understand what this could mean for you? Reach out to our friendly team here - or we can connect you with our trusted finance partner, Mortgage Domayne, for tailored advice.
