You may have heard the word ‘cash rate’ a lot lately. After the Australian pandemic lockdowns and two years of record-low interest rates, the RBA has announced a series of rate rises occurring over the past few months - with more to come.
Understanding the cash rate is a crucial step in understanding the mortgage interest rate you could be taking on, as well as the interest rate increases on your savings account.
Keep reading to dive deep into what is the cash rate, as well as learn who decides on rate changes and how it will impact your mortgage rates and savings account.
What is the Reserve Bank of Australia (RBA)?
The Reserve Bank of Australia (RBA) is Australia’s central bank. The RBA is responsible for maintaining and uplifting the Australian economy. Their decision to move the cash rate is made with economic data front of mind, in addition to the best interest of Australians.
What is a cash rate?
The RBA defines cash as ‘The interest rate on unsecured overnight loans between banks. It is the (near) risk-free benchmark rate (RFR) for the Australian dollar and is also known by the acronym AONIA in financial markets.’
On the first Tuesday of the month (except January), the Reserve Bank of Australia board members meet to determine if there should be an increase or decrease in the official cash rate. Each decision on the cash rates then impacts interest rates.
After two years of record-low interest rates, the RBA has now started raising the cash rate each month. This means loan providers are beginning to raise interest rates on home loans, credit products and savings accounts, which is an important term to understand.
What impacts the cash rate?
The RBA’s decision to change the cash rate and how many basis points they choose every month is determined by the following economic data:
- Level of inflation nationally
- Cost of living and impacts on the economy
- Movements in the property market
- Unemployment data
- How the Australian dollar is performing globally
- Consumer and business confidence
Do banks only charge interest rates based on movements in the cash rate?
The official cash rate is one of the factors that will impact rising or falling interest rates.
The cash rate is the interest rate charged between banks and lenders on loans. Therefore, it heavily impacts how many financial products cost.
Lenders charge interest rates on their loans and credit products for the following reasons:
- Accounting for their borrowing costs (e.g. the cash rate directly impacts how expensive it is for your bank to lend money)
- Make a profit for their shareholders and the business.
- Cover the costs of operating a financial institution
If the cash rate increases, the cost of borrowing money and operating costs all increase for the bank. Hence why they need to pass on the costs to customers.
It is common for lenders to follow the RBA, so when the cash rate increases or decreases, the bank follows.
A higher interest rate period isn’t ideal for borrowers making home loan repayments, although it benefits those saving money.
What is the current cash rate? (August 2023).
In October 2023, the RBA met and held Australia's official cash rate at 4.1%.
The RBA board meeting will occur again on the 2nd of November 2023, where they will decide if there is a further movement in the official cash rate.
What can your home loan look like when rates change?
As the cash rate rises, which is predicted for more months to come, you will see that your variable loan repayments interest on your savings account will change.
Specifically relating to your mortgage, your will notice an increased cost due to the rise in home loan interest rates. It is an excellent time to check how rates can impact your financial situation and create a plan or budget to prepare for this.
As an example of how a higher interest rate could affect your monthly repayment, let’s take a look at this example:
If you currently have a $600,000 mortgage and the RBA decides to raise the rate by 0.25%, your bank would likely pass on the 0.25% increase to you as the borrower and raise your interest rate by that amount. In this circumstance, your repayment would be roughly $948 extra annually.
How do cash rates impact homeowners and home buyers?
The main reason cash rates are spoken about so heavily in the media is their impact on consumers. This includes consumers’ ability to repay and borrow money for new loans.
The RBA cash rate directly impacts Aussies due to this being passed on by banks and lenders.
This will impact Australians in the following ways:
- Their ability to refinance current loans to other lenders can be more complex.
- Interest rate rises hike up mortgage repayments.
- Rate hikes impact house prices, typically resulting in a drop in the market.
- Rises impact the loan amount borrowers can take out, as suddenly, smaller loans are more expensive. Typically, new borrowers will take a hit on their borrowing power.
Will my fixed-rate loan be affected?
Your fixed rate won’t be impacted by the cash rate changes while you are still on your fixed term. In saying this, when your period ends, your rate will change to the standard variable rate, which can result in thousands of dollars of extra money you will need to put towards your monthly repayments.
You can check the impacts of rate changes through your bank’s rate calculator or your home loan specialist.
Learn more about fixed-rate vs variable-rate home loans.