Cash Rate vs Interest Rate: The Simple Difference

Many Australians use the terms cash rate and interest rate interchangeably, but they’re actually very different. Understanding the difference between the cash rate and interest rate can help you make smarter decisions when comparing home loans, refinancing your mortgage, or choosing the best savings account.

Whether you’re buying your first home, refinancing an existing house loan, or simply trying to understand why lenders like CommBank, Westpac, ANZ, NAB, Macquarie Bank, ING, Bendigo Bank and other lenders change their rates, this guide explains everything in plain English. By the end of this article, you’ll know exactly how the cash rate affects interest rates, why lenders don’t always move rates by the same amount, and how to use this knowledge to potentially save thousands over the life of your mortgage.

Difference Between Cash Rate and Interest Rate Explained

The easiest way to understand the difference between the cash rate and interest rate is to think of them as wholesale versus retail pricing.

The cash rate is the interest rate banks pay when borrowing money from each other overnight. An interest rate is the rate consumers pay when borrowing money through a home loan, mortgage, personal loan or credit card. It’s also the rate savers earn on products like savings accounts and term deposits.

Although they are connected, they are not the same thing. The Reserve Bank of Australia (RBA) controls the cash rate, while banks and lenders decide their own customer interest rates.

What Is the Cash Rate?

The cash rate is Australia’s official benchmark interest rate. It represents the cost of unsecured overnight borrowing between financial institutions and is the Reserve Bank of Australia’s primary tool for managing the economy.

The RBA changes the cash rate to help:

• -Control inflation.
•  
• -Support employment.
•  
• -Maintain sustainable economic growth.
•  
• -Influence borrowing and spending.
•  

When inflation rises too quickly, the RBA may increase the cash rate to slow spending. When the economy weakens, the RBA may reduce the cash rate to encourage borrowing and investment.

Difference Between Cash Rate and Interest Rate: Who Sets Them?

Who Sets the Cash Rate?

The Reserve Bank of Australia sets the Official Cash Rate Target during its monetary policy meetings.

Its decisions are based on factors including:

• -Inflation.
•  
• -Employment.
•  
• -Economic growth.
•  
• -Global economic conditions.
•  
• -Financial stability.
•  

The cash rate is not chosen by commercial banks.

Who Sets Interest Rates?

Banks, credit unions and non-bank lenders set their own interest rates. Each lender considers several factors before deciding its mortgage rates, including:

• -Its own funding costs.
•  
• -Competition.
•  
• -Operating expenses.
•  
• -Credit risk.
•  
• -Profit margins.
•  
• -Business strategy.
•  

This is why two lenders can have different home loan rates even when the RBA cash rate stays exactly the same.

How Does the Cash Rate Affect Interest Rates?

The cash rate does not directly determine your mortgage interest rate. Instead, it influences how expensive it becomes for banks to obtain funding. When the Reserve Bank increases the cash rate, borrowing money generally becomes more expensive for financial institutions. Banks often respond by increasing:

• -Variable home loan rates.
•  
• -Investment property loan rates.
•  
• -Personal loan rates.
•  
• -Business loan rates.
•  
• -Credit card interest rates.
•  

At the same time, many banks increase savings account and term deposit interest rates, giving savers a better return. When the RBA cuts the cash rate, lenders often reduce variable mortgage rates, making home loan repayments more affordable. However, there is no legal requirement for banks to pass on the full increase or decrease.

Difference Between Cash Rate and Interest Rate During RBA Rate Changes

One of the biggest misconceptions is that every RBA announcement automatically changes your mortgage by exactly the same amount. That simply isn’t true. For example, if the RBA increases the cash rate by 0.25%, one lender may increase variable home loans by 0.25%, another may increase them by only 0.15%, while another lender may not increase them at all.

Likewise, some lenders pass on only part of a rate cut. Competition between lenders often determines how much of the cash rate movement is passed on to borrowers. This is why comparing lenders regularly can save thousands over the life of a mortgage.

Why Don’t Banks Always Match the RBA Cash Rate?

Difference Between Cash Rate and Interest Rate Depends on Funding Costs

Banks don’t rely solely on the RBA cash rate to fund mortgages.

They also raise money through:

• -Customer deposits.
•  
• -Wholesale funding markets.
•  
• -International investors.
•  
• -Long-term bonds.
•  

These funding sources constantly change in price. If wholesale funding becomes more expensive, lenders may increase mortgage rates even if the RBA leaves the cash rate unchanged.

Difference Between Cash Rate and Interest Rate Depends on Competition

Competition also plays a major role. If lenders are aggressively competing for new customers, they may choose not to pass on a cash rate increase.

Instead, lenders may respond by offering cashback promotions, reducing comparison rates, discounting variable interest rates, providing more competitive refinance rates, or introducing fee-free home loan products to attract new borrowers and retain existing customers. That’s why simply watching the news isn’t enough when shopping for a mortgage.

Cash Rate vs Mortgage Interest Rate

What Factors Affect the Cash Rate?

The Reserve Bank reviews a wide range of economic data before changing the cash rate. The biggest influences include inflation. When prices rise too quickly, higher interest rates can reduce spending.

Employment also matters. A strong labour market may support higher rates, while weaker employment may encourage lower rates.

Economic growth is another major factor. If the economy slows significantly, lower interest rates can encourage borrowing and investment.

The RBA also considers international markets, global inflation, consumer confidence and financial stability.

Does Every Home Loan Follow the Cash Rate?

No. Variable home loans are the most likely to change after an RBA announcement. Fixed-rate home loans behave differently.

Their pricing is largely determined by future market expectations rather than today’s cash rate. This means fixed mortgage rates can rise before the RBA increases the cash rate—or even fall while the cash rate remains unchanged.

Should You Refinance When Interest Rates Change?

A cash rate announcement is often a good reminder to review your mortgage. Many homeowners remain on higher rates simply because they haven’t compared lenders recently.

Refinancing may allow you to reduce your monthly repayments, secure a lower variable interest rate, switch to a fixed-rate home loan, consolidate existing debts, unlock equity in your property, and take advantage of more competitive offers from lenders. Even a small reduction in your interest rate can save tens of thousands of dollars over a 25- or 30-year mortgage.

Frequently Asked Questions About the Difference Between Cash Rate and Interest Rate

What is the difference between the cash rate and interest rate?

The cash rate is the benchmark interest rate set by the Reserve Bank of Australia for overnight borrowing between banks. An interest rate is the rate lenders charge customers on home loans, mortgages, personal loans and credit cards, or pay on savings accounts.

Does the RBA set mortgage interest rates?

No. The RBA sets the official cash rate. Individual lenders decide their own mortgage interest rates based on funding costs, competition and business strategy.

Why didn’t my bank reduce my mortgage after an RBA rate cut?

Banks are not required to pass on the full cash rate movement. They may choose to pass on all, some or none of the change depending on their funding costs and competitive position.

Is the cash rate the same as my home loan interest rate?

No. The cash rate is a benchmark used within the banking system, while your home loan interest rate is determined by your lender.

Which home loans are affected most by the cash rate?

Variable-rate home loans generally respond most quickly to cash rate changes. Fixed-rate mortgages are influenced more by long-term funding markets and future interest rate expectations.

Should I compare lenders after every cash rate announcement?

Yes. Lenders respond differently to RBA decisions, so comparing home loans after each announcement can help you find a better rate and reduce your repayments.

The Bottom Line

Understanding the difference between the cash rate and interest rate gives you a significant advantage as a borrower. The cash rate is Australia’s benchmark rate used to guide the economy, while your mortgage interest rate is determined by your lender. Although the two are closely connected, they don’t always move together. That’s why comparing home loans regularly is one of the smartest financial habits you can develop. If your lender hasn’t kept your rate competitive, there may be better options available.

Compare the latest home loan, mortgage and house loan rates on RateBuster today, or use our free mortgage calculators to see how much you could save by refinancing to a lower interest rate.