What is the RBA cash rate and how does it affect your interest rate?

As of 30-June-2018, the official cash rate is at all-time lows. I have a many clients ask my how the RBA impacts the interest rate on their home loan?

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 on the first Tuesday of each month in order to safeguard 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 very strong impact on the interest rates your lender charges you.

There is a difference between the RBA rate and the rate you are charged because of a number of factors:
1. The bank has to charge something extra to make a profit.
2. The RBA interest rate is only the cost to borrow money for a short amount of time e.g. under 3 months, however a home loan is usually for 25-30 years.
3. Banks also borrow money from the wholesale funding market and not the RBA. This market prices the cost of borrowing by the banks based on supply and demand and this varies constantly.

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 mortgagees. 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. 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.

Many clients prefer to choose a fixed rate loan which sets the interest rate for some period of time for example 3 or 5 years. At Orange Mortgage and Finance Brokers, we don’t recommend fixed rates to second guess where interest rates are going but to help with budgeting. If you think interest rate rises will impact your living too much, choosing a fixed rate loan might be something to look at.

Give Orange Finance a call and we can discuss with you your circumstances and if a fixed rate loan might be a good option.