Every time the Reserve Bank meets, the headlines focus on one number: the cash rate. But most borrowers don't pay the cash rate. So how does it affect your home loan?
What the cash rate is
The cash rate is the interest rate on overnight loans between banks. The RBA sets a target for it and uses its market operations to keep the actual rate close to that target.
As at October 2026, the cash rate target is 4.60%.
Why the RBA changes it
The RBA's main job is to keep inflation between 2% and 3% on average, while supporting full employment.
- When inflation is too high, the RBA raises the cash rate to slow spending and borrowing.
- When the economy is weak and inflation is low, it cuts the rate to encourage spending.
In 2026 the RBA has raised rates four times, by 1.00% in total, because inflation stayed above target, driven by energy prices, capacity constraints and expectations.
How it flows into your home loan
Banks fund loans from several sources: customer deposits, short-term borrowing and long-term bonds. The cash rate influences all of these costs, especially short-term ones.
When the cash rate rises, banks' funding costs rise, and they usually lift variable home loan rates by a similar amount. When it falls, they usually pass on at least part of the cut, though sometimes not all.
Variable vs fixed rates
Variable rates move closely with the cash rate. Most lenders pass on changes within a couple of weeks.
Fixed rates are based more on expectations of where rates are heading over the fixed term. They're priced off longer-term funding costs, like bond yields and swap rates. That's why fixed rates often rise before the RBA moves, if markets expect hikes.
Lenders don't have to follow the RBA exactly
Lenders also consider competition, their own funding mix and their profit margins. So:
- Some lenders pass on more or less than the RBA's change
- Rates for investors and interest-only loans may move differently
- Existing customers might not get the same rate as new customers
That's why comparing lenders matters.
The gap between the cash rate and your rate
Your rate is the cash rate plus a margin. If the cash rate is 4.60% and you pay 6.49%, the margin is about 1.9%. Margins vary between lenders and products, and between new and existing customers.
What else affects your rate
- LVR: lower LVRs usually get better rates
- Loan purpose: owner-occupier rates are usually lower than investor rates
- Repayment type: principal and interest is usually cheaper than interest only
- Loan size: some lenders offer better rates on larger loans
- Package or basic: packages can include rate discounts for an annual fee
Key RBA dates
The RBA Monetary Policy Board meets eight times a year. The next meeting is on 3 November 2026. Decisions are announced at 2:30pm AEST/AEDT on the second day of each meeting.
Frequently asked questions
If the RBA cuts rates, will my rate drop automatically?
For variable loans, usually yes, though lenders decide how much to pass on. Fixed rates don't change during the fixed term.
Why did my fixed rate offer go up before the RBA moved?
Fixed rates reflect expected future rates. When markets expect hikes, fixed rates rise in advance.
Does the cash rate affect borrowing power?
Yes. Higher rates mean higher assessment rates, which reduce how much lenders will lend.
Want to know how the cash rate is affecting your loan? Call Finfident on 0424 545 654. We'll compare your rate to what's on offer now.
This article is general information only and doesn't take into account your objectives, financial situation or needs. Figures, rates and scheme rules are current as at October 2026 and can change. Finfident Finance Brokers (ABN 94 679 280 801) is Credit Representative 569374 of Outsource Financial Pty Ltd (ACN 131 090 705), Australian Credit Licence 384324.