RBA Cuts Cash Rate to 3.85%

On 20 May 2025, the Reserve Bank of Australia (RBA) reduced the official cash rate by 25 basis points to 3.85%, marking its second cut this year and the lowest level since May 2023. This decision reflects the RBA’s response to easing inflation and a strong job market, aiming to provide relief to mortgage holders and shield households from global uncertainties.

Understanding the RBA’s Decision

The RBA’s move is grounded in recent economic indicators:

• Inflation Trends: Annual trimmed mean inflation has decreased to 2.9%, falling below 3% for the first time since 2021. Headline inflation stands at 2.4%, within the RBA’s target range of 2–3%.

• Global Economic Concerns: The international economic landscape has become increasingly volatile, with recent trade tensions and geopolitical uncertainties contributing to a cautious outlook.

• Domestic Economic Activity: While private domestic demand shows signs of recovery and real household incomes have improved, some sectors report challenges in passing on cost increases due to weak demand.

The RBA emphasises its commitment to maintaining low and stable inflation, indicating that while the current policy is slightly less restrictive, it remains vigilant given the heightened level of uncertainty.

What This Means for You

Homeowners and Mortgage Holders

The rate cut offers potential relief for mortgage holders. For example, households with an average $750,000 loan might see monthly repayments decrease by approximately $114. This reduction can alleviate financial pressure and may encourage increased activity in the housing market.

First-Home Buyers

Lower interest rates can enhance borrowing capacity, making homeownership more accessible. However, increased competition in the property market may lead to rising home prices, posing challenges for first-home buyers trying to enter the market.

Savers

While borrowers benefit from lower interest rates, savers may experience reduced returns on savings accounts and term deposits. It’s advisable for savers to review their financial strategies to ensure their savings continue to grow effectively.

Investors

The rate cut can make borrowing more attractive for investors, potentially leading to increased investment activity. However, investors should remain cautious and consider the broader economic context when making investment decisions.

5 Smart Strategies to Maximise Savings Amidst Falling Interest Rates

1. Review and Negotiate Your Mortgage Rate

With the recent rate cut, it’s an opportune time to assess your current mortgage rate. Many Australians remain unaware of their exact mortgage rates, potentially missing out on savings. Engaging with your lender to negotiate a better rate or considering refinancing can lead to substantial financial benefits.

2. Maintain Higher Repayments

Even if your lender reduces the minimum repayment amount, continuing to pay the previous higher amount can significantly reduce the interest over the life of your loan. For instance, maintaining higher repayments on a $500,000 loan could save you around $48,000 in interest and shorten your loan term by over two years. 

3. Make Extra Repayments

Utilising additional funds, such as tax returns or bonuses, to make extra repayments can accelerate your mortgage payoff and decrease the total interest paid. This strategy enhances your financial stability and reduces long-term debt.

4. Utilise Offset Accounts or Redraw Facilities

Placing extra savings into an offset account or a loan with a redraw facility can lower the interest on your mortgage while keeping funds accessible. This approach effectively reduces your loan balance, leading to interest savings.

5. Switch to Fortnightly Repayments

Changing from monthly to fortnightly repayments results in 26 payments per year instead of 12, effectively making an extra monthly payment annually. This simple adjustment can lead to significant interest savings and a shorter loan term.

Navigating the Changes

In light of the RBA’s recent decision and the evolving economic environment, it’s crucial to reassess your financial strategies. Whether you’re a homeowner, prospective buyer, saver, or investor, understanding how these changes affect your financial situation is essential.

At Tradewise Solutions, we specialise in providing tailored advice to help you navigate these developments confidently. Our team is dedicated to assisting you in making informed decisions that align with your financial goals.

Disclaimer
The information provided in this information sheet does not constitute advice. The information is of a general nature only and does not take into account your individual situation. It should not be used, relied upon, or treated as a substitute for specific professional advice. We recommend that you contact Tradewise Solutions before making any decision to discuss your particular requirements or circumstances.