How the RBA's Interest Rate Changes Affect Your Mortgage

When the Reserve Bank of Australia (RBA) announces a change to the official cash rate, headlines follow. But what does that really mean for your mortgage?

The RBA’s official cash rate is the interest rate that banks charge each other for overnight loans. It’s not directly your mortgage rate, but it’s the benchmark that influences it. When the RBA raises rates, banks typically raise their mortgage rates too. When it cuts, mortgage rates usually fall.

Here’s the mechanism: if the RBA raises the official cash rate by 0.25% (a quarter point), your bank’s cost of borrowing money increases. To maintain their profit margin, banks pass this on to borrowers through higher mortgage rates. The amount of the pass-through is usually full or close to it, though some banks might delay or adjust differently than others.

If you have a variable-rate mortgage, changes to the RBA cash rate affect you directly and usually quickly—within days of the announcement. Your bank will notify you of the new rate, and your repayments increase (if rates rise) or decrease (if rates fall).

If you have a fixed-rate mortgage, you’re protected from RBA changes for the term of your fix. If you fixed for two years and rates rise significantly during that period, you pay the original fixed rate. This is a valuable protection, though it comes with a trade-off: if rates fall, you’re stuck at your higher rate (unless you break the fix, which usually incurs an exit cost).

The RBA typically adjusts rates in response to inflation, employment, and economic outlook. If inflation is high, the RBA raises rates to cool demand and bring inflation down. If the economy is weak and unemployment rising, the RBA cuts rates to encourage borrowing and spending.

Practically speaking: if you’re shopping for a mortgage and rates are expected to change, it might be worth fixing your rate to lock in certainty. If rates are likely to fall, a variable rate gives you the upside. A broker can help you understand the current rate outlook and decide what suits your situation.

Also consider your repayment strategy. If rates rise and your repayments increase, you might decide to maintain your old repayment level and use the difference to pay off principal faster. This is a smart move if you can afford it—you’ll shorten your loan term and reduce total interest paid.

Understanding the RBA’s role helps you make sense of mortgage market movements and plan your borrowing strategy with confidence.