Mortgage relief as RBA delivers third interest rate cut this year
‘Very welcome’ mortgage relief is on its way, with banks passing on the Reserve Bank’s much-anticipated interest rate cut as hope for further cuts are flagged.
Mortgage relief is on its way with the Reserve Bank announcing a much anticipated – and expected – cut to interest rates on Tuesday.
The RBA cut interest rates by 25 basis points, making it the third cut this year and taking the cash rate from 3.85 per cent to 3.6 per cent.
RBA governor Michele Bullock indicated there could be hope for further cuts, admitting during a post-rate cut press conference ‘the forecasts imply that the cash rate might need to be a bit lower than it is today to keep inflation low and stable’.
But she also warned demand and potential supply in the economy were becoming more balanced and ‘it may be that we don’t need to reduce rates as much either’.
Tuesday’s cut comes after the board announced its shock decision last month to leave the cash rate unchanged – a move which was described at the time as “soul crushing” for homeowners.
It was at odds with key economists and all four major banks which predicted a cut of 25 basis points.
Tuesday’s decision means savings of around $1104 a year for a $700,000 mortgage – assuming the full cut is passed on by lenders.
The RBA board said inflation had fallen substantially since the peak in 2022, as higher interest rates bring aggregate demand and potential supply closer towards balance.
Inflation continued to ease in the June quarter, with underlying inflation falling to 2.7 per cent and headline inflation at 2.1 per cent – both in line with expectations.
Their latest forecasts suggest inflation will keep moderating toward the 2-3 per cent target range, with interest rates expected to gradually decline.
But the board maintained that global economic uncertainty remained high.
“There is a little more clarity on the scope and scale of US tariffs and policy responses in other countries, suggesting that more extreme outcomes are likely to be avoided,” they said.
“Trade policy developments are nevertheless still expected to have an adverse effect on global economic activity, and there remains a risk that households and firms delay expenditure pending still greater clarity on the outlook.”
In Australia private demand is gradually recovering, they said, household incomes have improved, and financial conditions have eased.
While the labour market remains “a little tight”, unemployment rose slightly to 4.3 per cent in June.
Wage growth has eased, but productivity remains weak and unit labour costs are still high.
They said the decision to cut rates today was unanimous.
RBA governor Michele Bullock said the board will continue to focus on the data to guide its policy response.
“It may be that we don’t need to reduce rates as much either, as demand and potential supply in the economy get closer to balance and inflationary pressures ease,” she told reporters on Tuesday.
“The board’s discussing how we can sustain this. We’re continuing to analyse what developments mean for inflation and employment here in Australia.
“The forecasts imply that the cash rate might need to be a bit lower than it is today to keep inflation low and stable, and employment growing, but there is still a lot of uncertainty.”
Ms Bullock said there was no discussion of a larger rate cut.
“All board members were fully behind a cut of 25 basis points,” she said.
Treasurer Jim Chalmers said the decision was a “very welcome relief” for millions of Australians.
“This means three interest rate cuts in six months. It means the lowest interest rates for more than two years,” he said.
“This decision wouldn’t be possible without the progress Australians have made together on inflation.
“These interest rate cuts and the progress we’ve made in the economy have put us in good stead for the global (situation) that surrounds us and for the big economic challenges which confront us.
“Inflation is down substantially, and now, in a sustained way. Interest rates are coming down multiple times. Unemployment is low.”
Will the big four banks pass on the rate cut?
The Commonwealth Bank of Australia will reduce variable home loan rates by 0.25 per cent, to match the RBA’s cut.
The changes will come into effect on August 22.
“With now three rate cuts this year, Australian borrowers are getting some breathing room back in their budgets. It will be very welcome for those with a home loan,” CBA retail group executive Angus Sullivan said.
Westpac will also decrease variable interest rates by 0.25 per cent for new and existing customers, from August 26.
“Following the Reserve Bank’s decision, we’re making further reductions to home loan interest rates. We know many people continue to manage cost of living pressures and three rate cuts this year will no doubt provide some relief to household budgets,” Westpac chief executive consumer Carolyn McCann said.
ANZ will pass on the cut in full to variable home loan customers, from August 22.
The banking giant says it “continues to review” other interest and deposit rates.
Macquarie will also reduce its variable deposit rates and variable home loan reference rates from August 15.
Head of personal banking at Macquarie Ben Perham said savers were sick of banks not being upfront about rate cuts.
“Some banks are earning millions per day at the expense of their customers by quickly and quietly reducing their savings rates several days before dropping their home loan rates,” he said.
“We match the date for changing our consumer deposit rates and home loan rates, and that’s been our approach for years.”
NAB was the final major bank to declare it will reduce mortgage rates by 0.25 percentage points.
What the experts say about this rate cut and whether there’s more to come
Head of consumer research at comparison website Finder Graham Cooke said the cut wasoverdue and should be the first of many.
“Both the interest rate and the trimmed mean have been within the RBA’s target range for a while now,” he said.
“I would expect 100 basis points to come off the cash rate this year.
“Today’s cut is more welcome relief for many borrowers and is likely to lift consumer sentiment.
“It will save the average homeowner $100 per month, on top of the $200 saved over the last two cuts.
“I expect it to further revitalise interest in the housing market as 60 per cent of recent purchasers told Finder that cash rate cuts had influenced their decision to buy.”
On the flip side, retirees relying on interest income would feel the squeeze, and savers may need to hunt even harder for competitive deposit rates.
“Also, renters are again being left out in the cold, as the cash rate cut will push the gap between renters and homeowners wider.”
Mr Cooke said there was likelyto be one more cut this year, in November.
QIC chief economist Dr Matthew Peter said the rate cut would finally give Australian households something to cheer about with its first cut since May.
“The more than a third of Australian households with mortgages are likely to be cheering the loudest,” he said.
“For the average Queensland homeowner, with a $641k mortgage, a 0.25 per cent rate cut will mean an annual saving of around $1200.
“First home buyers will also benefit. Loans to Queensland first home buyers currently average $546k, so a new market entrant with an average loan will enjoy an annual saving of around $1,000.”
He said superannuants also stood to gain with lower interest rates lifting prices of assets such as shares, property, infrastructure and long-dated bonds, boosting returns of super funds.
However, he said not everyone would be celebrating the news with the over 65s likely negatively impacted.
“Many retiree households who are mortgage-free and rely on income from term deposits will suffer as their income falls,” he said.
He warned the scope for multiple future interest rate cuts was ‘limited’ due to a decline in productivity.
“Although the unemployment rate is rising and wage growth is moderating, Australia’s abysmal productivity performance means that growth in business unit labour costs remains too high and any further decline in productivity could see the RBA stall its easing cycle,” he said.
“The housing market could also be a cause of concern to the Bank.
“House prices have been marching higher since the RBA’s first rate cut in February, and the RBA must stay vigilant that it doesn’t spark a buying frenzy that places further pressure on house prices and housing costs.”
CreditorWatch Chief Economist Ivan Colhounsaid the rate cut was overdue.
“I would have cut the cash rate in July and think the six members of the new Monetary Policy Board that wanted to wait for further confirmation of slowing inflation from the Q2 CPI were being overly conservative, given monetary policy impacts the economy with a lag,” he said.
“To minimise any likely rise in unemployment the RBA needs to act well before that occurs.
“The cut will be welcome news for both businesses and consumers with mortgages, as it will help offset some of the continuing cost of living pressures being felt broadly throughout the community.”
Mr Colhoun also warned the decision was a ‘double-edged sword’ with house prices again expected to rise, hurting buyers, but benefiting sellers.
“Housing markets are already seeing prices rise again, meaning it’s a double-edged sword for first home buyers as it raises borrowing capacity but also house prices,” he said.
“Retirees that rely on interest income are negatively affected, but even with the three cuts this year, term deposit rates thankfully remain much higher than previously.
“Interest rate reductions are generally supportive for share markets, another major of retirement assets.”
Mr Colhoun said the extent to which interest rates were cut further this year would depend critically on the rising unemployment rate.
“I’m expecting one further interest rate cut this year, likely in November.”
Dr Susan Stone, Credit Union SA chair of economics at UniSA said she was not surprised at the decision, given slowing inflation.
“Data from the four big banks showed that most mortgage holders kept payments the same after the last rate cut, preferring to build equity more quickly,” she said.
“This makes sense as on average, a 25 point cut saves mortgage holders less than $100/month on a $500,000 mortgage.”
Dr Stone said, while the cut could make it more affordable for new buyers to borrow for a home, its impact on prices could counteract the benefits.
“The housing market will continue to experience demand pressures,” she said.
“Lower interest rates generally translates into more people being able to afford to borrow to buy a house. This is good news for bowers and sellers, but bad news for others trying to buy as this will likely increase competition which may ultimately push up prices.”
Retirees and others who derive much of their income from investments will see those returns fall as markets adjust to new lower rate levels, Dr Stone said.
“But there are still opportunities to invest, so many may be able to reallocate funds to maintain return levels,” she said.
“For retirees, while they are unlikely to reallocate investment funds, the size of the cut isn’t likely to have overly large impacts on payments.”
Dr Stone said she expected at least one more cut this year.
”But that will depend on continued declines in services prices, what happens with import and energy prices, and geopolitical uncertainty,” she said.
“We are also seeing big spending projects at both the Federal and State levels, tax cuts coming in both 2026 and 2027.
“The RBA will want to ensure that inflation is well and truly a thing of the past so these additional spending pressures on the economy don’t re-spark the flame.”
Oliver Hume chief economist Matt Bell said the decision was good news for all property markets.
“The strong increase in land sales numbers we saw across all markets in the June quarter, on the back of the February and May rate cuts, was put at some risk with the surprise hold by the RBA in July,” he said.
“The surprise no-cut in July slowed some of the recovery in land markets and house price growth.
“But this decision is likely to see increases in activity in both new and established markets in the remainder of the year.
“The two rates cuts to date have delivered six consecutive months of dwelling price growth and one of the biggest jumps in quarterly land sales in what has traditionally been the country’s largest land market, Melbourne.
“For those with an existing mortgage of $750,000, this decision saves more than $1300 each year in mortgage payments, and for those trying to enter the market, the amount they can borrow rose significantly.”
Mr Bell said markets were split between another two or three cuts between now and May 2026.
“But we err on the more aggressive side given some of the early indications we’re seeing of softness in the US labour market,” he said.
“We expect another single cut by December, to be followed up by two more in 2026 to continue to support new land sales activity across the country through the remainder of 2025 and well into late 2026.”
RSM Australia economist Devika Shivadekar said while she expected the RBA will continue to remain cautious in their approach, she does expect the cash rate to fall to 3.35 per cent by the end of the year with another cut in November.
“The extra cash in people’s pockets could boost spending, but it’s still unclear whether Australians will splurge or continue to squirrel it away,” she said.
“If households keep playing it safe, the boost to growth may be smaller than the RBA hopes.
“On the flip side, if spending jumps faster than expected, it could help the economy but risk reigniting inflationary pressures.”
Master Builders Australia CEO Denita Wawn said building and construction businesses needed lower interest rates to help reduce the cost of doing business, while lifting demand in the market.
“Over the past several months, we’ve heard from builders that consumers are still reluctant to pursue new home building. Hopefully, today’s announcement gives them a bit more reassurance,” he said.
“The monetary policy settings have achieved their objective of lowering inflation, now we need to look at the industry’s capacity to respond to higher demand and get consumers the best bang for buck.”
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