What is the cash rate and what does it mean for borrowers?
There’s plenty of talk at the moment about interest rates and mortgages and it can be a little unnerving, not to mention sometimes overwhelming, when you hear some of the jargon.
Chances are, if you’re reading this, you’re either looking to purchase a home or you already have a mortgage, and you may have heard the financial experts on the News mention the term ‘cash rate’.
Let’s take a look at what this ‘cash rate’ is all about and how it affects you?
The Reserve Bank of Australia (RBA) sets a benchmark interest rate for the Australian dollar, at which lenders pay to borrow funds from lending institutions. This is called the ‘cash rate’.
The cash rate affects mortgages, savings accounts, the exchange rate, and is an important tool for managing national monetary policy.
The RBA makes changes to the cash rate to reflect demand within the economy. For example, if the economy is strong and high demand is pushing up the price of goods, the RBA might raise the cash rate to slow things down a bit to keep inflation within a healthy range.
On the other hand, when the economy is weak and demand is low, the RBA lowers the cash rate to encourage spending and investment to give the economy a boost.
Around 2.30pm on the first Tuesday of every month (excluding January), the RBA announces what the official cash rate will be. The RBA is quite conservative and don’t like to ‘surprise’ the Australian public, so don’t worry, if you’ve got your ears and eyes open, you’ll generally get to know what changes are coming.
The cash rate is used by the banks to set their variable home loan interest rates. If you’ve got a fixed home loan rate, you don’t need to be concerned.
It’s key to note here that the banks are not obligated to pass any cash rate decreases onto their customers. This can be frustrating for borrowers when even a slight decrease can make a sizeable reduction in mortgage payments and ultimately huge savings over the time of the loan.
If your bank is appearing to be a bit stingy on following through with decreases in the cash rate, perhaps make an appointment and find out why or talk to some mortgage brokers, as they can often have a say on better rates, so explore any options you might have to negotiate a lower rate.
A rise in the cash rate will inevitably increase the amount of your repayments, and depending on the amount of your loan and your personal financial situation, even a .05% increase can cause pressure on the hip pocket.
Here’s a table which shows how a cash rate decision of rise, hold or cut can affect your monthly home loan payments.
| Loan amount | $200,000 | $400,000 | $500,000 | $750,000 | $1,000,000 |
| Rise: 0.25% interest rate increase | $953 | $1,907 | $2,384 | $3,576 | $4,768 |
| Hold: Current repayment amount* | $815 | $1,630 | $2,038 | $3,057 | $4,077 |
| Cut: 0.1% interest rate decrease | $804 | $1,609 | $2,012 | $3,018 | $4,024 |
| *Current repayment amount based on lowest rate from Mortgage Choice’s lender panel (2.74% as of 09 May 2022) over a 30 year term using Mortgage Choice home loan repayment calculator. | |||||
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