More mortgage relief: RBA slashes cash rate 25bp to 3.85%

The Reserve Bank of Australia (RBA) has delivered its second rate cut of the cycle, slashing the cash rate by 25 basis points to 3.85%, as was largely expected. 

The move is expected to bring fresh relief to mortgage holders and hopeful buyers alike.

Borrowing power could also be boosted for those looking for their first mortgage, considering a home upgrade, or investing.

The 25 basis point cut could boost an average buyer's borrowing power by around $12,000, according to modelling from Tiimely Home.

Your Mortgage will be providing a running breakdown of lenders' reactions to the RBA's May cut over the coming days and weeks – keep up to date with your home loan interest rate.

RBA slashes cash rate to 3.85%

The decision to cut the cash rate came on the back of continued economic improvement.

Underlying inflation returned to the RBA's 2% to 3% target in the first quarter of 2025 (falling to 2.9%) and the labour market remains strong – fulfilling the RBA's dual mandate (at least for now).

Although, continuously low unemployment could hamper inflation efforts – the nation's unemployment rate remained at 4.1% in April while the economy added a blockbuster 89,000 jobs, seeing the participation rate at near-record highs of 67.1%. 

"Data on inflation for the March quarter provided further evidence that inflation continues to ease," the RBA monetary policy board's statement reads.

"With inflation expected to remain around target, the Board therefore judged that an easing in monetary policy at this meeting was appropriate."

"The Board will be attentive to the data and the evolving assessment of risks to guide its decisions."

The RBA's updated Statement on Monetary Policy, released alongside the rate decision, includes revised forecasts for inflation and unemployment.

The RBA's preferred trimmed mean inflation (previously expected to fall to 2.7% by mid-year and plateau) is now predicted to fall ever so slightly lower to 2.6%.

Meanwhile, unemployment (previously forecast to largely remain stagnant) is now expected to rise to 4.3% in the December quarter.

RBA governor Michele Bullock will front a media conference at 3:30pm AEST Tuesday, potentially providing more insight into the board's decision.

When will home loan interest rates fall?

With the cash rate now at 3.85%, lenders are expected to begin announcing whether – and by how much – they'll reduce home loan rates.

Some may pass on the cut in full, others partially, while a few may hold off entirely.

It might be the case that more lenders choose to pocket the second rate cut of the cycle; Virgin Money was the only lender of note to not pass on the RBA's February cut.

Alternatively, some lenders may only cut home loan rates by 10 or 20 basis points, somewhat buoying their bottom lines.

Typically, lenders notify borrowers of home loan rate changes days or weeks in advance.

Once the new rate kicks in, borrowers will need to wait until their following repayment to realise savings – meaning they mightn't notice a difference for around six weeks or so.

Importantly, some lenders – including CommBank – require customers to actively request a reduction in repayments.

If they don't, their payments remain the same, effectively resulting in additional repayments, helping reduce their loan balance faster.

CommBank data shows only 14% of eligible customers lowered their repayments after February's cut.

What does the RBA’s rate cut mean for house prices?

Australian house prices hit a record high following the RBA’s February rate cut – and they’ve continued rising in the months since.

Tuesday’s move is expected to have a similar effect.

“Both buyer confidence and borrowing capacities will be buoyed as interest rates continue to fall, helping to drive demand and home price growth,” said REA Group senior economist Eleanor Creagh.

While affordability issues will likely remain – even in the wake of rate cuts – population growth and the housing shortage are expected to fortify property values.

“Despite affordability constraints, we expect prices will keep lifting over the coming months, but the rate of growth is likely to be more modest compared to recent years,” Ms Creagh said.

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_{Image courtesy of the RBA}