An RBA rate cut doesn't guarantee your home loan gets cheaper.
When the Reserve Bank of Australia cuts the official cash rate, it’s natural to expect your home loan rate to fall by the same amount. But that’s not always what happens. Some lenders pass on the full cut; others pass on only part of it; and some don’t move at all.
Understanding why this happens — and knowing what to do about it — can save you thousands of dollars over the life of your home loan. For a broader view of how the RBA cash rate affects your borrowing position, read our article on RBA rate cuts and borrowing power.
How to get a better rate
If your bank hasn’t passed on the full rate cut, you have three main options.
Refinancing eligibility
Whether refinancing makes sense depends largely on the type of rate you’re on.
If you’re on a variable rate, you can refinance at any time without penalty. Many borrowers wait three to four years before refinancing, but waiting too long can mean missing out on savings. If you’re with a lender that hasn’t passed on recent rate cuts, even a small reduction in your interest rate can add up to a significant saving over the remaining life of your loan.
If you’re on a fixed rate, refinancing before the fixed term ends will typically trigger break costs. These can be substantial and may outweigh the benefit of a lower rate, particularly if rates have fallen since you fixed. Run the numbers carefully before breaking a fixed rate — the break cost calculation is complex and lenders must provide it on request.
If you have a split loan with part variable and part fixed, the variable portion can be adjusted or refinanced without triggering break costs on the fixed component. Use our loan repayment calculator to model the savings from a lower rate before you decide.
Fixed vs variable
A period of rate cuts can make the choice between fixing and staying variable particularly difficult.
Fixing your rate locks in certainty. You know exactly what your repayments will be for the fixed term, which makes budgeting straightforward. The downside is that if rates continue to fall, you won’t benefit — and if you want to make extra repayments, many fixed rate products cap or restrict this.
Staying variable gives you full flexibility. You can make unlimited extra repayments, which is one of the most effective ways to reduce your total interest and pay off your home loan faster. If rates fall further, your rate falls automatically.
A split loan lets you get some certainty on part of your loan while keeping flexibility on the rest. If you’re weighing this option, our split loan calculator can help you model different scenarios before you commit.
Why banks hold back
Banks don’t pass on the full RBA cut primarily because of the relationship between their cost of funds and their lending rates.
A bank’s cost of funds is the interest it pays to depositors on savings accounts and term deposits. When the RBA cuts the cash rate, that doesn’t necessarily reduce the bank’s funding costs by the same amount — particularly if the bank wants to keep deposit rates attractive to retain savers.
The spread between what a bank pays depositors and what it charges borrowers is the margin it earns. If a bank passes on the full RBA cut to borrowers but keeps deposit rates steady, the spread narrows and profit falls. Shareholders notice, boards push back, and so banks routinely pass on only a portion of each cut.
This is why borrowers with the highest loyalty to a single lender often end up on the worst rates. The best way to ensure you’re getting a competitive rate is to regularly review what else is available in the market — and to be willing to switch if your lender doesn’t respond to a rate request.
Common questions
Q: Am I entitled to a rate cut if the RBA reduces the cash rate?
Not automatically. Lenders set their own variable rates and are not legally required to pass on RBA rate changes in full or at all. If your lender doesn’t pass on a cut, you have the right to ask for a better rate or take your business elsewhere.
Q: What break costs should I expect if I refinance from a fixed rate?
Break costs on a fixed rate loan are calculated based on the difference between your fixed rate and current wholesale rates, multiplied by the remaining loan balance and term. The figure can range from a few hundred dollars to tens of thousands. Ask your lender for a written break cost calculation before making any decision.
Q: How often should I review my home loan rate?
A review every one to two years is a reasonable starting point. If there has been a significant move in the RBA cash rate, or if you’ve substantially improved your equity position, those are specific triggers to check whether better options are available. A mortgage broker can conduct this review at no cost to you.