Today, I want to talk about something that affects nearly every Australian with a mortgage, savings account, or investment portfolio: cash rate changes.
What is the Cash Rate?
The cash rate is the interest rate that the Reserve Bank of Australia (RBA) charges commercial banks on overnight loans. Think of it as the foundation upon which all other interest rates in our economy are built.
When the RBA adjusts this rate, it creates a ripple effect throughout the entire financial system.
Impact on Your Mortgage
Let’s start with the most immediate concern for many Aussies: home loans.
When Rates Rise:
When interest rates climb, variable rate mortgage holders feel the pinch almost immediately with increased repayments, typically within a month of the RBA announcement. Those with fixed-rate mortgages enjoy temporary protection until their fixed term expires, at which point they may face payment shock. New borrowers encounter stricter lending criteria and reduced borrowing capacity in this environment.
When Rates Fall:
During rate decreases, variable mortgage holders should see their repayments drop, though banks don’t always pass on the full benefit. Fixed-rate mortgage holders won’t see immediate relief, but might find refinancing becomes an attractive option. New borrowers generally benefit from easier loan approvals with more favourable terms when rates trend downward.
Strategic Moves for Mortgage Holders
Consider fixing a portion of your loan to buffer against future increases while making extra repayments during lower rate periods to build a safety cushion. It’s wise to review your mortgage annually to ensure competitive terms and maintain an offset account that both reduces interest payments and provides emergency fund access when needed.
Impact on Investments
Cash rate changes don’t just affect borrowers—they influence your investment strategy too.
When Rates Rise:
During rate increases, cash investments and term deposits become more attractive with higher returns, while existing bonds may lose value, though new bonds offer improved yields. Share markets often experience short-term volatility, particularly affecting dividend stocks, and property markets may cool as borrowing costs increase and dampen demand.
When Rates Fall:
As rates decline, returns on cash and term deposits diminish, driving investors toward higher-risk assets. Existing bonds typically increase in value while new bonds offer lower yields. Share markets generally benefit, especially companies with strong growth potential, and property markets may see increased activity as cheaper borrowing stimulates demand.
Investment Strategies in Changing Rate Environments
Diversification remains your best defence against interest rate volatility, complemented by a ladder approach for term deposits to maintain flexibility. Regularly review your bond portfolio duration to manage interest rate risk and focus on quality companies with strong balance sheets during rising rate periods. Remember that attempting to time the market based solely on interest rate predictions rarely succeeds long-term.
Small Business Considerations
For small business owners, changing rates require strategic responses: review business loans and consider refinancing when advantageous; assess your pricing strategy as operating costs fluctuate; carefully time major capital expenditures relative to interest rate trends; and maintain healthy cash reserves to navigate changing economic conditions with confidence.
The Bottom Line
Interest rates are cyclical, and successful financial management requires adapting to these cycles rather than trying to predict them perfectly.
The best approach? Stay informed, maintain diversification, review your position regularly, and focus on your long-term financial goals rather than reacting to short-term fluctuations.
Remember, your financial strategy should be as unique as your circumstances. If you’re unsure about how cash rate changes affect your specific situation, seeking professional advice is always a smart investment.
Written by Michael Andrew Bankier