The RBA's first cut since 2020: what 25 basis points is worth on a mortgage

If you carry a variable-rate mortgage, something changed yesterday afternoon — though probably not yet your repayment. On 18 February 2025 the Reserve Bank Board lowered the cash rate target from 4.35 per cent to 4.10 per cent, effective the following day. It is the first reduction the Board has made since November 2020. On a $635,000 loan with 30 years left to run, a cut passed on in full is worth about $103 a month.

That is worth having. It is not the same thing as the pressure built up since 2022 coming off. The more useful question is not what the cut is worth this month, but how the number in the RBA's media release becomes the number on your statement — because those two things are connected loosely rather than mechanically.

What the Board decided, and the reason it gave

The Board's statement on the decision rested on underlying inflation. Underlying inflation in the December quarter was 3.2 per cent, which the Board said "suggests inflationary pressures are easing a little more quickly than expected". It also pointed to continued subdued growth in private demand and easing wage pressures, and said those factors gave it more confidence that inflation is moving sustainably towards the midpoint of the 2 to 3 per cent target range.

The distinction between headline and underlying inflation does most of the work there. The ABS reported that the CPI rose 2.4 per cent over the twelve months to the December 2024 quarter, which is inside the target band. But that number was held down by electricity rebates and lower fuel prices, and both of those are temporary. The trimmed mean, which strips out the largest price moves in either direction, was 3.2 per cent — down from 3.6 per cent, and still above the band. The Board moved on the direction of the trimmed mean rather than on the headline.

It was careful about what followed. The statement said monetary policy "has been restrictive and will remain so after this reduction in the cash rate", and that the Board "remains cautious on prospects for further policy easing". The cut returns 25 of the 425 basis points added between May 2022 and November 2023. The target had sat at 4.35 per cent since November 2023.

What 25 basis points is worth in dollars

On a loan with 30 years to run, a 25 basis point cut is worth roughly $16 a month for every $100,000 owed. That rule of thumb is unusually stable: it is $15.98 if you start at 6.00 per cent and $16.35 if you start at 6.50 per cent, so the starting rate barely changes the answer.

For a worked example, take the average size of a new owner-occupier home loan in Queensland in the December quarter 2024, which the ABS put at $635,000. Two caveats before the arithmetic. That is a state-wide figure for new lending, not a Gold Coast figure. And someone five years into a loan owes considerably less than someone settling this month, so the dollar effect on an established mortgage is smaller.

Take a Gold Coast household carrying a balance of that size. On $635,000 over 30 years at a starting rate of 6.30 per cent, the monthly repayment is about $3,930. Move the rate to 6.05 per cent and it becomes about $3,828. The difference is $103 a month, or roughly $1,235 across a year.

Remaining term matters more than most people expect. The same $635,000 with 15 years left rather than 30 sees a monthly change of about $86 instead of $103, because a shorter loan carries less interest for the cut to work on.

The cash rate is not the rate you pay

The RBA's own definition of the cash rate is the interest rate on unsecured overnight loans between banks. No household borrows at it. A borrower on the example's 6.30 per cent was paying close to two percentage points more than the cash rate, and that gap is where the whole question of pass-through lives.

The RBA is direct about this in its explainer on how monetary policy is transmitted. Monetary policy acts as a benchmark for interest rates in the economy, but it is not the only determinant. Conditions in financial markets, changes in competition and the risk attached to different types of loans all feed in, and as a result the spread between the cash rate and other interest rates varies over time.

The cash rate is the tide, not the wave. It moves the level everything else sits on, but what arrives at your particular loan depends on a good deal else.

Why a cut is not always passed on in full, or straight away

Three mechanisms explain most of it.

Funding costs move more slowly than the cash rate

A bank does not fund your mortgage overnight. It funds it with deposits and with wholesale borrowing raised months or years ago at rates fixed at the time. A cash rate change moves the cost of the shortest slice of that mix immediately, and the rest reprices on its own schedule. The average cost of funding a loan book therefore moves by less, and later, than the cash rate does.

A lender chooses where to apply the change

A quarter of a percentage point can go to the existing variable book, to advertised rates for new borrowers, to investor loans, or to the deposit rates paid to savers. Those are commercial decisions and nothing requires them to be uniform, which is why two lenders can respond to the same decision differently.

An announcement and an effective date are different things

Lenders set their own effective dates, and those usually fall some weeks after the decision rather than the next morning. A repayment that looks unchanged in February is not necessarily evidence that a cut has been withheld.

Fixed loans sit outside all of this. A fixed rate was set when the loan was fixed and does not move with the cash rate at all until the fixed term ends. Business borrowing follows its own path again: commercial and business facilities are priced on risk margins that can move independently of the household market.

What it does, and does not do, to borrowing capacity

This is where expectations tend to run ahead of the arithmetic.

APRA expects lenders to assess a new borrower's ability to meet repayments at a rate at least 3 percentage points above the loan product rate. A 25 basis point cut lowers the product rate, so it lowers the assessment rate by the same 25 points. The buffer itself does not move.

When APRA raised the minimum buffer to 3.0 percentage points in 2021, from the 2.5 points then in common use, it estimated that a 50 basis point increase in the buffer would reduce maximum borrowing capacity for the typical borrower by around 5 per cent, putting aside other parts of the serviceability assessment. A 25 basis point move in the assessment rate is half that order of magnitude.

The buffer exists so that capacity does not swing hard on today's rate, and for most applicants the rate is not the binding constraint anyway. What usually sets the ceiling first:

• declared living expenses, and how they compare with the lender's benchmark
• existing debts, including credit card limits rather than balances
• income type and stability, particularly for self-employed applicants
• each lender's own floor rate and policy settings

Two lenders can assess the same applicant on the same day, at the same cash rate, and land tens of thousands of dollars apart. Working out where you actually sit is a lender-by-lender exercise, and it is the sort of thing we go through on the home loan side.

What happens to your repayment now

Most lenders reset the minimum repayment down to the new amount from a stated date, with notice. Some hold the repayment where it was unless you contact them, and a few leave the choice with you.

Both outcomes are available and they do different things. Taking the lower repayment frees up cash flow now. Leaving the repayment where it was sends the difference to principal each month, which shortens the term. Which of those suits depends on whether the household needs the cash flow this year or wants the loan term to move, and that is a question about your circumstances rather than about the cash rate.

One detail people miss. If you hold an offset or redraw balance, the interest that balance saves you is calculated at your loan rate, so a lower rate makes the same offset balance slightly less valuable in dollar terms. It is a small effect and it runs the opposite way to the repayment saving.

The Board's decision tells you what the RBA did. What it is worth to you depends on your balance, your remaining term, your lender's pass-through and its effective date. Those are all knowable numbers, and they are worth knowing before you decide whether the change is worth acting on. If it helps to work through them with someone, that is what our lending work covers.