If you follow financial news in Australia, you’ve almost certainly heard about the Reserve Bank of Australia (RBA) and its cash rate decisions. But what exactly is the cash rate, how does it affect your home loan, and what should you do when rates change? Here’s everything you need to know.
What Is the RBA Cash Rate?
The RBA cash rate is the interest rate that commercial banks pay to borrow money from each other overnight. It’s the benchmark rate that underpins virtually all lending in Australia. The RBA’s Board meets regularly throughout the year to review and potentially change the cash rate as part of its mandate to keep inflation within a 2–3% target band.
How Does the Cash Rate Affect Home Loan Rates?
When the RBA raises the cash rate, banks’ borrowing costs increase — and they pass those costs on to borrowers via higher variable interest rates on home loans. When the RBA cuts rates, variable loan rates generally fall.
The relationship isn’t perfectly linear — banks don’t always pass on the full rate change, and they sometimes move rates independently of the RBA. But the cash rate is the primary driver of variable home loan rates in Australia.
How Much Does a Rate Change Affect Your Repayments?
On a $600,000 variable rate home loan over 30 years, a 0.25% rate rise adds approximately $90/month to your repayments. A 1% increase adds roughly $360/month — that’s $4,320 per year.
For investors with multiple properties and higher loan balances, the impact of rate movements is amplified significantly. A 1% rate rise on $2 million in total investment debt adds $20,000+ per year to holding costs.
Variable vs Fixed Rates and the Cash Rate
Variable rate home loans move with the cash rate. Fixed rate loans are insulated from cash rate changes during the fixed term — which is why many borrowers rushed to fix rates before the RBA’s rate hiking cycle, and why the decision to fix or stay variable is so consequential.
Fixed rates are priced by lenders based on their expectations of where variable rates will be over the fixed term — they essentially price in future rate movements. This is why fixed rates often rise in anticipation of RBA rate hikes, and fall in anticipation of cuts.
How to Protect Yourself from Rate Rises
Build a buffer — Always set your budget assuming rates could be 1–2% higher than today. If you can still afford repayments at that level, you have a meaningful safety margin.
Use an offset account — Money in an offset account reduces the interest you pay, giving you a natural buffer against rate rises.
Make extra repayments when rates are low — Building up a repayment buffer during low-rate periods gives you flexibility to reduce repayments if financial pressure increases.
Consider splitting your loan — Fixing a portion of your loan provides certainty while leaving a variable portion that benefits if rates fall.
Refinance when rates change — If your current lender doesn’t pass on rate cuts, or if another lender is offering a materially better rate, refinancing is always an option worth evaluating.
Staying Ahead of Rate Changes
At Assembly Finance, we keep a close eye on the RBA calendar and rate environment on behalf of our clients. When rate changes occur — or when better deals become available — we proactively reach out to clients to assess whether a refinance or loan restructure makes sense. Get in touch with James to make sure your loan is always working as hard as possible for you.
