The Impact of Changes in the RBA Cash Rate: How It Affects Home Loans, Car Loans, Business Loans, and the Cost of Living

The Reserve Bank of Australia (RBA) plays a crucial role in shaping the nation's economic environment through its monetary policy decisions. One of its most influential tools is the official cash rate — the interest rate on unsecured overnight loans between banks.

When the RBA changes this rate, the ripple effects can be felt across every corner of the Australian economy, from mortgage repayments to groceries at the checkout. 

Limit the impact of the fluctuating RBA Cash Rate. Contact Jor'åki Finance to review your loans and make sure you are getting the best deal.

1. Home Loans: The Immediate and Emotional Impact 

Home loans are among the most sensitive financial products to changes in the RBA cash rate. Most variable-rate mortgages move in lockstep with the cash rate. When the RBA raises rates, lenders typically pass on the increase to borrowers. 

Example: Suppose a homeowner has a $600,000 mortgage with a 5.5% interest rate. If the RBA raises the cash rate by 0.25% and the lender passes this on in full, the new interest rate becomes 5.75%. That could mean an increase of over $90 per month in repayments — more than $1,000 a year. For households already stretched thin, this can significantly affect budgeting and spending. 

2. Car Loans: Higher Rates May Stall Big Purchases 

Car loans — especially unsecured or fixed-term loans — are also influenced by the RBA cash rate, though not as immediately or directly as home loans. When interest rates rise, lenders typically increase car loan interest rates to maintain profitability. 

Example: A $40,000 car loan over 5 years at a fixed 7.5% interest rate would result in monthly repayments of about $801. If rates increase to 8%, repayments rise to roughly $811. While this $10 may seem minor, it reflects broader borrowing conditions that can deter people from financing new vehicle purchases, impacting both individual buyers and the auto industry. 

3. Business Loans: Cash Rate Increases Affect Growth and Employment 

For businesses, especially SMEs, the cost of capital is crucial. Business loans often have variable interest rates, so when the RBA lifts the cash rate, loan servicing costs rise. This makes it more expensive for businesses to invest in equipment, expand operations, or hire staff. 

Example: A small business with a $300,000 business loan at 6% will see annual interest costs of $18,000. If the RBA rate hikes push this to 6.5%, interest costs jump to $19,500. That $1,500 difference might lead to delaying expansion plans or reducing operating expenses. 

4. Cost of Living: A Broad and Deep Impact 

Perhaps the most widespread effect of rate changes is on the cost of living. When the RBA increases rates, the goal is often to cool inflation. However, the short-term consequence is reduced disposable income, especially for borrowers. 

Examples: 

• Housing: As mortgages become more expensive, renters may face higher rents as landlords pass on increased costs. 

• Consumer Spending: Households with higher repayments cut back on discretionary spending — reducing demand for travel, dining, and retail. 

• Inflation Targeting: By discouraging spending and borrowing, the RBA attempts to bring inflation back within its target range of 2–3%. However, this can take months to materialize and may cause pain in the interim. 

The Fine Balance of Monetary Policy 

Changes to the RBA cash rate are a powerful lever to guide the economy — but they are not without side effects. While rate hikes aim to control inflation and stabilize the economy, they can place financial pressure on households, businesses, and borrowers across the board. Conversely, rate cuts can stimulate borrowing, spending and saving but risk fueling inflation if overused. 

RBA base rate changes can also present an opportunity to save and reduce costs by refinancing to a better loan. Not all lenders increase their rates in step with the RBA; in some case it makes sense to refinance to a lender who has kept their rates low. Conversely, when RBA base rates decrease, not all lenders will drop their rates – another opportunity to save when refinancing to those lenders whose rates are most competitive. 

Understanding how the RBA base rate changes affect everything from your mortgage to your grocery bill empowers individuals and businesses to make informed financial decisions in a dynamic economic landscape.

Speak to Jor’åki Finance for a review of your finances and loans to ensure that you are getting the best deal.