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How does the RBA impact home loan interest rates?

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Figuring out interest rates on home loans can be confusing, especially for those new to the world of real estate and home buying. There’s a lot of jargon and concepts that might not make sense at first, but don’t worry. It’s not as complicated or hard to understand as it may seem. 

Here’s a crash course on the RBA, cash rate, home loan interest rates, and how they’re all connected. 

Understanding the RBA (Reserve Bank of Australia) 

What is the RBA exactly? The RBA or Reserve Bank of Australia, is Australia’s central bank. It manages the country’s monetary policy, handles gold and foreign exchange services, and issues currency.  

The RBA is not a typical commercial bank. Its roles and responsibilities have wide-ranging effects that impact home loan interest rates, with its main goal is to maintain Australia’s economic health. 

What is the cash rate? 

The cash rate refers to the interest rate that banks pay to borrow funds from other banks on an overnight basis in the money market. Banks do this to meet their daily cash needs. Essentially, the cash rate set by the RBA is the market interest rate on these overnight loans. 

How does the RBA affect the cash rate? 

The RBA sets the cash rate, which is used as the benchmark rate for everything including mortgages, exchange rates, personal loans, and more. The RBA has a monthly meeting to decide whether or not to increase, decrease, or keep the cash rate where it is. 

When the RBA makes changes to the cash rate, the effects are wide and far reaching. Everything is affected, from spending to investments to inflation. Changes to the cash rate can be influenced by a number of factors such as: 

  • Inflation 
  • Cost of living 
  • Economic growth 
  • International economy 
  • Australian dollar performance 
  • Unemployment levels 
  • Real estate market performance 
  • Consumer confidence 
  • Business confidence 

Banks and lenders generally follow cash rate movements when determining the interest rates on their loans. Rates of non-bank lenders aren’t always determined by the RBA alone. Other factors such as business costs, market competition, and costs of funding such as the Bank Bill Swap Rate can also have a significant impact on the rate a lender will offer.

The cash rate, interest rates & you

Now, you might be asking yourself, ‘how does the Reserve Bank influence interest rates?’ The answer is pretty straight forward: When the cash rate, set by the RBA, increases or decreases, home loan interest rates are likely to follow suit for most lenders in Australia

Lenders can decide whether to pass on the increase or reduction of the cash rate to their customers. Many banks will follow the patterns of the cash rate movements, however, non-bank lenders are not always bound by the RBA's decisions. Although the RBA cash rate can be a good indicator for movements on home loan rates, there are many other factors lenders must consider before changing their interest rates.

There are times when a lender may change their interest rates even though cash rates haven’t changed. These changes are possible any at any time, due to a large variety of factors including costs of funding, domestic economic conditions, as well as the Bank Bill Swap Rate (BBSW).

Take note that even if your lender has the final say on your interest rate, you can still negotiate with them for a better rate.

How does the cash rate affect your home loan interest rate? 

Your home loan interest rate is likely to rise and fall along with cash rate movements. If you’re on a variable home loan interest rate and your rate increases, you can expect to start paying a higher monthly repayment as your monthly interest charge will increase.

On the flip side, if the cash rate decreases and your home loan interest rate does too, you can expect to be paying a lower monthly repayment due to the reduced interest costs.

Variable home loan rates change for a myriad of reasons other than cash rate, learn more about them here. If you have an existing variable home loan, it’s always best to check with your lender so you can keep updated with any changes that may occur. 

For those with fixed interest home loans, you don’t have to worry about cash rates affecting your interest rates during your fixed term. Fixed interest home loans are exempt from any changes during the fixed term because of the nature of the loan itself. It doesn’t matter if the cash rate increases or decreases; the interest on your mortgage will stay the same for the fixed term. 

However when your fixed term expires, your loan will generally revert to the standard variable rate available at that time– which will then be subject to interest rate fluctuations, unless you decide to re-fix your mortgage.

Whether or not your interest is affected by the cash rate will depend on what type of home loan you’ve taken out or will take out. Learn more about the differences between variable rate home loans and fixed rate home loans here

Now that you know how cash rates can impact home interest rates, you can more easily understand your home loan interest rates and how they may change due to the RBA cash rate, along with other factors. This will allow you to confidently decide on the best way to finance your home.

When it comes to home loans, it’s best to speak to the right people. At loans.com.au, we have a team of friendly lending specialists who are happy to help you with your home buying journey. Book an appointment today!

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About the article

As Australia's leading online lender, loans.com.au has been helping people into their dream homes and cars for more than 10 years. Our content is written and reviewed by experienced financial experts. The information we provide is general in nature and does not take into account your personal objectives or needs. If you'd like to chat to one of our lending specialists about a home or car loan, contact us on Live Chat or by calling 13 10 90.

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