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 3.6% – the third drop this year.
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?
Established in 1960, the Reserve Bank of Australia (RBA) serves as the nation’s central bank and operates independently from the government. Its primary goal is to maintain economic stability and support a healthy financial system.
A key responsibility of the RBA is managing inflation—ideally keeping it within a target range of 2–3% annually, aligned with wage growth. In addition to monitoring the strength of the Australian dollar, the RBA sets the official cash rate, which directly impacts interest rates across the board, including those on mortgages and savings.
What are interest rates, anyway?
Interest rates have a direct impact on how much it costs banks and lenders to borrow money.
When the RBA increases the cash rate, it becomes more expensive for banks to borrow funds. These higher costs are usually passed on to consumers through increased interest rates on home loans, personal loans, and credit cards. Conversely, when the RBA cuts the cash rate, borrowing becomes cheaper for banks, and lenders may reduce interest rates for customers in response.
Although you don’t borrow directly from the RBA, any change to the cash rate flows through the financial system—affecting how much interest you pay (or save) on your mortgage, credit card, and other loans.
How Interest Rates Affect Your Borrowing Power
If you’re planning to buy or build your first home, interest rates can significantly influence how much you’re able to borrow.
Although lenders aren’t legally obligated to follow the RBA’s cash rate decisions, most align their interest rates accordingly. When the cash rate rises, borrowing becomes more costly for banks, and they typically pass that cost onto borrowers in the form of higher loan interest rates and stricter lending criteria.
This can directly impact your borrowing power. Lenders will reassess your income, expenses, and risk profile—especially if further rate increases are expected—which may result in a smaller loan offer and make it harder to afford your ideal home.
On the flip side, when rates are cut—as they have been recently—lenders may ease their criteria slightly, potentially allowing you to borrow more. However, this varies from lender to lender, and increases in borrowing capacity aren’t guaranteed.
How Interest Rates Affect Your Mortgage Repayments
Even if you’ve already bought your home, changes to the cash rate still affect you.
If you’re on a fixed-rate mortgage, your repayments stay the same throughout the fixed term. That can be a relief during periods of rising rates, but if rates drop—as they recently have—you won’t benefit until your fixed term ends and you refinance or switch to a variable option.
If you’re on a variable-rate loan, your repayments move with the market. When the RBA cuts the cash rate, lenders often reduce their interest rates in response, potentially lowering your monthly repayments. However, if rates rise, your repayments are likely to increase as well.
Whether you’re already repaying a loan or planning to buy, RBA rate movements influence more than just interest—they impact your budget, borrowing capacity, and overall financial outlook.
