For the first time in nearly three years, the Reserve Bank of Australia has cut the official cash rate.
The Reserve Bank of Australia (RBA) recently slashed the cash rate by 0.25 percentage points, bringing it to 3.85% in May 2025.
This decision has sparked widespread interest among homeowners and prospective buyers.
What does this mean for your mortgage?
Will your home loan repayments drop automatically?
This blog provides clear, factual answers about how the RBA’s rate cut impacts home loans, what actions borrowers can take, and more.
Why Did The RBA Cut Interest Rates?
Interest rates are the RBA’s main tool to control inflation and economic activity. When inflation is high, rates usually rise. When economic growth slows or inflation falls, the RBA might lower rates to support spending and investment.
In early 2025, inflation began to stabilise, and consumer spending dropped. Unemployment numbers showed small increases, and household savings started to shrink. All these signs pointed to a slowing economy.
The RBA responded by cutting the cash rate by 0.25%, bringing it down to 3.6%. The goal was to reduce borrowing costs, encourage more consumer spending, and prevent the economy from slipping into a downturn.
How Banks Respond To RBA Cuts?
When the RBA cuts the cash rate, banks are not legally obligated to pass on these reductions to borrowers.
Their decisions are influenced by several factors:
Key Factors Affecting Bank Responses
| Factor | Influence on Bank Decisions |
|---|---|
| Funding costs | Banks source money from various channels beyond the RBA> |
| Profit margins | Financial institutions balance shareholder expectations with competitive pressures |
| Economic outlook | Forward projections affect risk assessments and lending strategies |
| Competition | Market positioning relative to other lenders |
| Regulatory requirements | Capital adequacy rules impact lending capacity |
Most major banks generally announce their response within days of an RBA decision. This response might include passing on the full cut, a partial cut, or in some cases, no reduction at all.
Smaller lenders and non-bank financial institutions might take longer to announce their positions as they assess market conditions.
How the RBA’s Interest Rate Cut Affects Home Loans?
The RBA sets the cash rate, which influences the interest rates banks charge on loans.
When the RBA cuts the cash rate, banks often reduce their variable home loan rates, potentially lowering monthly repayments for borrowers.
On 20 May 2025, the RBA lowered the cash rate from 4.1% to 3.85%, marking the second cut this year.
Major banks, including Commonwealth Bank, NAB, ANZ, Westpac, and Macquarie, have confirmed they will pass this 0.25% reduction to variable-rate home loan customers, effective from late May or early June 2025.
This follows a similar cut in February 2025, offering further relief after 13 rate hikes between May 2022 and November 2023.
However, lower rates don’t always mean immediate savings. Many banks do not automatically adjust your direct debit repayments, even if you’re on a variable rate.
For instance, Commonwealth Bank, NAB, and ANZ require borrowers to contact them to reduce repayments.
If you maintain your current repayment amount, the extra money reduces the principal, potentially shortening your loan term.
This decision depends on your financial goals—whether to lower monthly costs or pay off the loan faster.
Will Your Repayments Fall Automatically?
Not necessarily!
While banks pass on the rate cut to variable loan rates, many don’t automatically lower your direct debit amount.
For example, the Commonwealth Bank reported that only 14% of eligible customers reduced repayments after the February 2025 cut.
If you want to lower your repayments, you may need to contact your bank.
Commonwealth Bank allows adjustments via their app or NetBank the day after the rate change takes effect. ANZ and NAB also require you to opt in for reduced payments.
Always verify with your lender to ensure you receive the full 0.25% reduction.
If you keep repayments unchanged, the extra funds go toward the principal, reducing your loan balance faster. This can save years off your loan term and thousands in interest.
For instance, on a $500,000 loan with a 30-year term at 6.04%, repayments are $3,010.62 monthly.
After the cut to 5.79%, repayments drop to $2,930.58, but maintaining the higher payment accelerates loan payoff.
What Should Borrowers Do Now?
With this rate cut, it’s an opportune time to review your mortgage arrangements.
Consider these options:
- Check your current rate against market offerings
- Calculate potential savings from refinancing
- Review your loan structure and features
- Consider whether fixing a portion of your loan provides security
- Ensure you’re making the most of offset accounts if available
The current rate movement provides a good opportunity to reassess your position, but any decisions should be based on your personal financial circumstances and long-term objectives.
Get The Right Advice Before You Make A Move!
If you’re wondering how the RBA’s interest rate cut could affect your home loan, Credit Hub is here to help. With dedicated managers, simple online tools, and access to competitive rates, we make the process clear and easy. Whether you’re buying, refinancing, or just need a loan check-up, our expert team is ready to guide you—without affecting your credit score.
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