15 May How RBA rate changes affect your interest rate
With the RBA setting the official cash rate at record breaking lows, it’s a good time to work out the impacts of the interest rate on your home loan and whether you are getting a good deal or not.
When the interest rate on your home loan fluctuates, it can feel as though you don’t have control of your debt. Despite the frustration, interest rate changes are a part of every loan’s lifespan and warrant a good deal of consideration.
The interest rates that banks charge on their home loans are influenced by the Reserve Bank of Australia’s (RBA) cash rate.
The cash rate is reviewed by the RBA on a monthly basis in order to protect Australia’s economic stability. The cash rate is the rate charged on loans made between the RBA and your lender. This, in turn, has a direct impact on the interest rates your lender charges you.
The RBA is a bank to the banks. The cash rate is effectively the rate at which the RBA will lend to the banks, and what the banks effectively use as a reference rate for other financial products and transactions.
When the cash rate is changed by the RBA, lenders decide whether or not to mirror the new rate in the interest they charge their clients with mortgages.
This is entirely up to the lender in question and depends on a variety of factors such as the lending market and how the lender is performing at the time of the cash rate change.
If you look at the mortgage market, specifically in its own right, it is very competitive. It is about the lender trying to get the right outcome on the deposit side of the balance sheet within the context of a very, very competitive marketplace, but recognising that a reference rate has changed and, therefore, looking at where they stand.
Some lenders choose to move their interest rate changes by less than the RBA’s change and, in these instances, other lenders may be offering lower interest rates than the one you currently have.
Keeping track of how your lender manages cash rate changes and where that leaves you as the person paying the interest can be time consuming. This is made more difficult by fees, charges and the flexibility offered by different loan products, which all need to be weighed up alongside the interest rate.
A simple way to regain control of your interest rate is to lock it in for a period, if you believe rates are not likely to fall further. Fixed rates offer less flexibility, but more certainty.
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