When the interest rate on your home loan fluctuates, it can feel as though you don’t have control of your debt. Despite being frustrating, interest rate changes are a part of every loan’s lifespan and warrant your consideration.
The interest rates that banks/lenders charge on their home loans are influenced by the Reserve Bank of Australia’s (RBA) cash rate.
The cash rate is the rate charged on loans made between the RBA and your lender. This, in turn, has a very strong impact on the interest rates your lender charges you. The RBA reviews the cash rate on a monthly basis in order to safeguard Australia’s economic stability.
Advantedge General Manager Brett Halliwell explains that “The RBA is a bank to the banks. The cash rate is effectively the (interest) rate at which the RBA will lend to the banks, and what the banks effectively use as a reference rate for other things.”
When the RBA decides to change the cash rate, lenders in turn decide whether or not to mirror the new rate in the interest they charge on their mortgagees to you.
This is entirely up to the lender in question and depends on the market and how the lender is performing at the time of the cash rate change.
Some lenders choose to shift their interest rate changes higher than the RBA’s cash rate change and, in these instances, other lenders may be offering lower interest rates than the one you currently have.
“If you look at the mortgage market, specifically by itself, it is very competitive,” Halliwell says. “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.”
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, and is made more difficult by fees, charges and the flexibility offered by different loan products, which all need to be weighed alongside the interest rate.
A simple way to regain control of your interest rate is to lock in a fixed rate, if you believe rates are not likely to fall further. Fixed rates offer less flexibility, but more certainty.
With the RBA setting the official cash rate at all-time lows, it’s a good time now to work out how this impacts the interest rate on your home loan and whether you are getting a good deal or not.
If you would like to know what options are available to you, contact us today.