What is the cash rate and how does it affect your money?

The Reserve Bank of Australia (RBA) regularly makes headlines when it announces a cash rate decision. But what does that decision mean for your mortgage, savings and everyday finances?

Whether the cash rate rises, falls or stays the same, its effects can extend beyond your home loan. It can influence borrowing costs, savings returns and investment markets.

Here's how the cash rate works, why the RBA changes it and what it could mean for your money.

Key takeaways

• The cash rate influences interest rates. It affects borrowing and savings rates, but banks set their own rates.
• Your mortgage repayments may change. Variable-rate loans can be affected when lenders adjust their rates.
• Your savings returns may change. Deposit rates can rise or fall following RBA decisions.
• You don't need a mortgage to be affected. Interest rates can influence spending, investments and superannuation.
• Your circumstances matter. The impact depends on your loans, savings, investments and financial goals.

What is the cash rate  in Australia?

The cash rate is the interest rate banks pay when borrowing money from each other overnight.

The RBA sets a cash rate target, which guides this rate and influences interest rates throughout the Australian economy.

When headlines report that the RBA has raised or lowered the cash rate, they're generally referring to a change in this target.

The cash rate isn't the same as the interest rate you pay on your mortgage or earn on your savings. Banks set their own rates based on funding costs, competition and other factors.

Learn more through the RBA's cash rate overview.

Why does the RBA change the cash rate?

The RBA uses the cash rate as a key tool to influence inflation and economic activity.

Its monetary policy decisions aim to support price stability and full employment.

When the cash rate rises, borrowing generally becomes more expensive. This can reduce spending and borrowing, helping ease inflationary pressure.

When the cash rate falls, borrowing may become cheaper, potentially encouraging spending and investment.

The effects aren't immediate or equal for everyone. The RBA may also leave the cash rate unchanged while assessing economic conditions.

How does the cash rate affect your money?

The impact depends on whether you're borrowing, saving or investing.

1. Your home loan repayments

If you have a variable-rate mortgage, a change in the cash rate may affect your repayments if your lender adjusts its interest rate.

When rates rise, your interest costs and required repayments may increase, leaving less room in your household budget. When rates fall, your repayments may decrease.

Even a small change in interest rates can affect the overall cost of your home loan. The impact depends on your loan balance, remaining term and repayment arrangements.

Use PictureWealth's loan repayment calculator to explore how different interest rates may affect your repayments.

2. Your fixed-rate home loan

If you have a fixed-rate mortgage, your contracted interest rate generally stays unchanged during the agreed fixed period.

However, the rate available when your fixed term ends may be different.

It's worth checking when your fixed period expires, what happens afterwards and whether any fees or restrictions apply.

3. Your savings and term deposits

Cash rate changes can influence the interest you earn on savings.

When rates rise, some savings accounts and new term deposits may offer higher returns. When rates fall, the interest available may decrease.

Banks don't always pass on the full change, so the rate you actually receive matters more than the headline cash rate.

If you rely on savings income, including during retirement, changes in deposit rates may affect your regular income.

4. Your super and investments

Interest rates can influence share markets, bond prices, property and other investments.

For example, higher borrowing costs can affect company profits, while changes in interest rates can influence bond values.

Your superannuation may hold a mix of these assets, so the impact depends on your investment option and how its assets perform.

Your super balance won't necessarily move in the same direction as the cash rate.

For more detail, read our guide to how interest rates affect mortgages, super and investments.

What happens when the cash rate rises or falls?

The effects can vary across your finances.

These are possible effects, not guaranteed outcomes. Individual lenders and financial products may respond differently.

Why doesn't your bank's interest rate match the cash rate?

Banks consider more than the RBA's cash rate target when setting mortgage and savings rates.

Their decisions also reflect funding costs, competition, operating expenses and lending risk.

This means a bank might change its rates by a different amount from the RBA's decision, or at a different time.

The RBA explains how bank funding costs influence lending rates.

If your lender changes its rate, it's worth looking beyond the headline percentage. Loan fees, features, repayment arrangements and your remaining loan term also affect the overall cost.

PictureWealth's lending team can help you review your home loan and explore available options based on your circumstances.

What should you check after an RBA cash rate decision?

You don't need to predict the RBA's next move to understand how interest rates affect your finances.

Here are four things worth reviewing:

1.  Check your mortgage rate

Look for updates from your lender and confirm whether your interest rate, repayment amount or effective date has changed.

If you're approaching the end of a fixed-rate period, review the options available before your existing arrangement expires.

2. Review your household budget

If repayments have changed, consider how they affect your regular expenses and available cash flow.

Our budget planner can help you organise your income and spending.

3. Compare your savings and loan options

Check the interest rates, fees and conditions that apply to your existing accounts.

If you're considering refinancing or changing products, compare the total costs and features rather than the advertised rate alone.

Explore PictureWealth's financial calculators to help assess different scenarios.

4. Look at your broader financial picture

Your mortgage, savings, super and investments don't operate in isolation.

Understanding how they fit together can help you assess the potential impact of interest rate changes.

PictureWealth's Welfie app helps bring your connected accounts, assets, superannuation and liabilities into one view, making it easier to understand your overall financial position.

Frequently asked questions

Is the cash rate the same as an interest rate?

The cash rate is a specific interest rate for unsecured overnight borrowing between banks. It influences mortgage and savings rates, but banks determine the rates offered to customers.

Who sets the cash rate in Australia?

The Reserve Bank of Australia's Monetary Policy Board sets the cash rate target, considering inflation, employment and broader economic conditions.

Why does the RBA raise the cash rate?

The RBA may increase the cash rate target to help reduce inflationary pressure. Higher borrowing costs can discourage spending and borrowing, although the effects take time.

Will my mortgage repayments change if the cash rate changes?

They may change if you have a variable-rate mortgage and your lender adjusts its rate. Existing fixed-rate loans generally retain their contracted rate during the fixed period.

Do banks have to pass on cash rate cuts?

No. Banks determine their own lending and deposit rates, so changes may differ in size and timing from the RBA's decision.

Does the cash rate affect you if you don't have a mortgage?

Yes. Cash rate changes can influence savings returns, other borrowing costs, investments, superannuation and broader economic activity.

What is the current cash rate in Australia?

The RBA publishes the latest target and monetary policy decisions on its official cash rate page.

The cash rate is one part of your financial picture

RBA decisions can influence what you pay to borrow, what you earn on savings and how financial markets perform.

But the real impact depends on your own finances, including your loan arrangements, savings, investments and financial goals.

Understanding those connections can help you put interest rate headlines into perspective.

At PictureWealth, our financial advisers and lending specialists can help you review your circumstances and understand how different parts of your finances fit together.

Get in touch with PictureWealth to discuss your financial circumstances. Review the applicable Financial Services Guide before deciding whether to use our advice services.

General information disclaimer: This article contains general information only and does not take into account your personal objectives, financial situation or needs. Consider whether the information is appropriate for your circumstances and seek professional advice where appropriate. Interest rates and investment values can change, and outcomes are not guaranteed.