Understanding the RBA Cash Rate and How It Affects Your Home Loan

On 18 February 2025, the Reserve Bank of Australia (RBA) announced a decrease in the official cash rate by 0.25% per annum (p.a.), bringing it down to 4.10% p.a. But what exactly does this mean for borrowers, and how does it impact home loan interest rates? Let’s break it down in simple terms.

What is the Cash Rate?

The cash rate is the interest rate set by the RBA that influences the cost of borrowing money in the financial system. It represents the rate at which banks lend to each other in the overnight money market. The RBA adjusts this rate as part of its monetary policy to help manage inflation, economic growth, and employment levels.

What are Basis Points?

Interest rate movements are often discussed in terms of ‘basis points’ (bps). One basis point is equal to 0.01%. So, when the RBA reduces the cash rate by 25 basis points, it means a 0.25% decrease in the official rate.

How Does the Cash Rate Impact Home Loan Interest Rates?

Since the cash rate affects the cost of funds for banks, any change in this rate generally influences the interest rates banks charge their customers on loans and mortgages. Here’s how it works:

• Banks’ Cost of Borrowing: Banks borrow money from the financial markets or from each other. When the cash rate is lowered, it reduces their borrowing costs, allowing them to offer lower interest rates on loans.
• Variable Home Loan Rates: If you have a variable home loan, your interest rate is likely to move in line with changes in the cash rate. In this case, banks have announced a 0.25% p.a. reduction in their variable home loan interest rates following the RBA’s decision.
• Fixed Home Loan Rates: Fixed rates are determined by broader economic factors, including expectations about future cash rate movements. While a cash rate cut doesn’t immediately impact fixed rates, it can influence future rate offerings.
• Savings and Deposit Rates: Just as loan rates tend to decrease, banks may also lower interest rates on savings accounts and term deposits, making it less attractive to save but more affordable to borrow.

What Does This Mean for Borrowers?

For homeowners with variable-rate loans, this decrease in the cash rate translates into lower monthly repayments, providing some financial relief. For prospective homebuyers, a lower interest rate environment may improve borrowing power and affordability.

Final Thoughts

While the RBA’s rate cut is good news for borrowers, it’s essential to consider how interest rate changes align with your financial goals. If you’re thinking about refinancing, purchasing a new home, or understanding how these changes impact your mortgage, feel free to reach out for expert advice!

If you have any questions or want to explore your home loan options, contact me today!