The difference between the cash rate and the mortgage interest rate

Introduction

You have probably heard a lot about the cash rate and interest rate changes recently. For many borrowers, it’s easy to mix them up, especially when both seem to shift at the same time. Even though they’re closely linked, they each play a different role in the lending system.

The cash rate is set by the Reserve Bank of Australia and acts as a benchmark for the cost of borrowing between banks. Mortgage interest rates are what lenders charge you for your home loan. The cash rate has a strong influence on these rates, but they are not the same.

In this article, we explain the role of the cash rate, the purpose it serves in the broader economy, and the impact it has on the interest you pay on your mortgage.

What is the cash rate?

The cash rate is the interest rate set by the RBA for overnight loans between commercial banks. It serves as the benchmark for interest rates across the Australian economy, influencing everything from credit card rates to home loans.

The RBA adjusts the cash rate to maintain inflation within a target range and support economic stability. For example, if inflation is too high, the RBA may increase the cash rate to reduce spending. If unemployment is high or the economy is sluggish, it may reduce the cash rate to stimulate borrowing and investment.

What is a mortgage interest rate?

A mortgage interest rate is the rate that borrowers pay to lenders on their home loans. This is the cost of borrowing money to buy a property. Mortgage rates can be fixed, where the rate stays the same for a set period, or variable, where it can change depending on broader economic factors and lender decisions.

Lenders use the official cash rate as one of the factors when setting their mortgage rates. However, they also consider other things such as funding costs, borrower risk, market competition, and internal profit targets. This means that mortgage rates often move in response to the cash rate, but not always by the same amount.

Key difference between cash rate and interest rate

The table below makes it easier for you to understand the difference between the cash rate and the mortgage interest rate.

Aspect	Cash rate	Interest rate
Definition	The cash rate is the interest rate that banks pay to borrow money from each other overnight. It reflects the overall cost of short-term funds in the economy.	The interest rate is what a lender charges a borrower for using its money. In home loans, it determines how much interest you pay on top of your principal.
Who sets it	The Reserve Bank of Australia (RBA).	Individual lenders (such as banks, credit unions, or online lenders).
Main purpose	Used by the RBA to influence inflation, guide economic activity, and support employment.	Used by lenders to manage lending risk, funding costs, and competition in the market.
What it affects	Affects how much it costs banks to borrow funds. This flows on to other rates in the economy.	Directly affects your home loan repayments and total cost of borrowing.
Applies to	The wholesale lending market between financial institutions.	Retail borrowers, including home loan customers.
How often does it change	Reviewed by the RBA each month (except January) and may change depending on economic conditions.	Can change at any time, especially if you have a variable-rate loan. Fixed rates stay the same during the agreed period.
When it rises	Banks pay more to access funds. This can lead to higher costs for lenders.	Lenders often increase interest rates on loans, which means higher repayments for borrowers.
When it falls	Banks pay less to access funds. This reduces the cost of borrowing for lenders.	Lenders may reduce interest rates on loans, resulting in lower repayments for borrowers.
Impact on borrowers	Indirect. Borrowers do not pay the cash rate, but it can trigger changes in loan interest rates.	Direct. Borrowers pay this rate on their loan, and it determines the size of monthly repayments.

How do cash and interest rates affect your home loan repayments?

The cash rate is the benchmark interest rate that banks use when lending money to each other. When the cash rate changes, it often leads to changes in mortgage interest rates offered by lenders.

If the cash rate goes up, lenders usually increase their home loan interest rates. This means borrowers with variable-rate loans will likely see their repayments rise. If the cash rate goes down, lenders may lower interest rates, which can reduce monthly repayments for variable-rate customers.

Borrowers with fixed rates are not affected during their fixed term. Their interest rate remains the same until the fixed period ends. After that, they may be switched to a variable rate or offered a new fixed term.

In both cases, refinancing can help. If you are on a variable rate, refinancing allows you to move to a lower interest rate or access better loan features. If your fixed term is ending soon, refinancing gives you the chance to compare lenders and choose a more competitive option before your repayments change.

This can help reduce overall interest costs and keep your loan on track. Understanding the home loan refinance process is key to making the most of these opportunities and ensuring your loan continues to meet your financial needs.

What happened after the RBA’s third rate cut in August 2025?

After the Reserve Bank of Australia cut the official cash rate by 0.25 percentage points on August 12, 2025, lowering it to 3.60 per cent, Australia’s major lenders, including the Big Four banks (CBA, Westpac, ANZ, and NAB), responded quickly by announcing reductions to their variable home loan interest rates. This marked the third rate cut for the year, following earlier moves in February and May

For a borrower with a variable-rate mortgage, the latest cut translated into noticeable monthly savings. For example:

• A homeowner with a $500,000 loan could see their repayments drop by around $76 per month.
• A borrower with a $1 million loan might save approximately $152 per month from this cut alone.

When combined with the two earlier cuts in 2025, the cumulative savings could exceed $228 to $456 per month, depending on the loan size and how much of the cut was passed on by their lender.

The lower repayments provided relief for households managing rising living costs, allowing many to ease pressure on their monthly budgets.

The rate cut also encouraged many borrowers to reassess their mortgage arrangements. Refinancing activity increased as homeowners compared current interest rates with alternative offers, and in some cases, switched lenders to access more competitive terms.

This shift reflected a broader trend of Australians taking a more active role in managing their home loans in a lower-rate environment.

Do lenders always follow the cash rate?

Not necessarily. While the cash rate strongly influences mortgage interest rates, lenders do not always adjust their rates in line with every change. Several factors can lead to different outcomes.

Funding sources

Lenders don’t rely solely on the cash rate. They fund loans through customer deposits, wholesale markets, and overseas sources. If the cost of these funds rises, a lender may increase rates even if the cash rate stays the same.

Competition in the market

In a competitive lending environment, banks might hold off on raising rates to stay attractive to new and existing customers. This can result in rates remaining steady, even when the cash rate moves.

Risk considerations

If a lender expects greater risk in the economy or among borrowers, it may raise rates to offset potential losses. These decisions are based on internal risk reviews, not just the cash rate.

Profit goals and business strategy

Lenders need to cover operating costs and achieve financial targets. Sometimes, they adjust interest rates to meet those goals, regardless of any changes to the official cash rate.

Strategies for navigating changing interest rates

Understanding how interest rates work is just the starting point. Being able to respond when rates change can help you protect your finances and manage your loan more effectively. Here are some strategies to help you stay prepared and make informed decisions as the lending environment shifts.

Keep up with RBA updates

The Reserve Bank of Australia announces its cash rate decision each month based on current economic conditions. These updates often influence the interest rates offered by lenders. Being aware of these changes can help you plan for possible increases or decreases in your repayments.

Understand your loan options

Fixed, variable, and split loans all respond differently to market changes. Fixed loans give repayment certainty. Variable loans offer flexibility if rates fall. Split loans combine both benefits. Choosing the right structure depends on your financial goals and how much risk you are comfortable with.

Make extra repayments when you can

Paying a little more than your required amount each month can reduce your total interest and help you repay your loan sooner. Even an extra hundred dollars a month can make a significant difference over time.

Make use of an offset account and redraw facilities

Many home loans offer offset accounts or redraw facilities that reduce the interest charged on your loan. An offset account links directly to your loan and reduces the balance on which interest is calculated. A redraw facility lets you access extra repayments if needed. Both features can help you save on interest while giving you access to funds when necessary.

Set aside a financial buffer

As interest rates rise, so do repayments. Having savings put aside gives you room to adjust without disrupting your budget. Even a few months’ worth of repayments can provide peace of mind.

Review your loan regularly

Your loan should match your needs and current market conditions. Reviewing it every 12 months or after major rate changes gives you the chance to refinance or renegotiate with your lender if a better deal is available.

Be aware of loan conditions

Some loans come with fees or limits on early repayments or refinancing. Always check your loan documents before making changes so you can avoid unnecessary costs.

Get personalised advice

A mortgage broker or financial adviser can help you understand how rate changes affect your specific situation. Their insight can help you find a better deal or restructure your loan with confidence.

Follow broader financial trends

Changes in inflation, employment, and global markets can all influence interest rates. Staying informed through news, podcasts, or expert commentary helps you respond to rate movements with a better understanding of what’s behind them.

Use redraw facilities

If your loan includes a redraw facility, you can access extra repayments when needed. This feature can offer flexibility without needing separate personal loans, but it’s best used for genuine needs rather than routine spending.

Revisit your budget after rate changes

When your repayments increase or decrease, your budget should adjust too. Review your monthly spending to make sure essentials are covered, and look for areas where you can cut back if needed. Staying proactive can help you avoid financial pressure later on.

Final thoughts

Now that you have a better understanding of the difference between the cash rate and mortgage interest rate, it’s a good time to check whether your current loan is still the right fit. Even small changes in rates can affect your repayments, so staying proactive can make a meaningful difference over time.

If you're thinking about refinancing or simply want to compare your options, our lending specialists are here to support you. We will review your current loan and help you find a solution that works for your needs. Get in touch with us today for a free home loan review.