November 24, 2017

How the Reserve Bank Cash Rate Impacts Home Loan Rates

When you look at home loans and compare mortgage rates, you may encounter the term “Reserve Bank cash rate” or simply “cash rate”. This refers to the market interest rate on overnight loans among financial institutions. It is monitored by the Reserve Bank of Australia which is the country’s central bank and has the ability to increase or lower the official cash rate. This is through basis points to manage economic inflation.

What is Reserve Bank cash rate?

This refers to the market interest rate on overnight loans among financial institutions.

The Reserve Bank of Australia covers the country’s monetary policy and discusses how to manage it. The Governor will then release a statement which influences various aspects not only home loans but also bonds and stocks, deposits, and bank rates.

So how does the Reserve Bank cash rate affect home loan rates? Based on the set cash rate, banks will make adjustments to the fees and charges to their products. As the RBA raises or cuts the cash rate, banks will also change their interest rates for home loans. This strong influence can be seen particularly in variable rate home loans. In other words, the Reserve Bank cash rate plays a significant role on what the interest rates on home loans will be, as well as the amount of repayments you need to handle each month. That is why it is important to be aware of it when you compare mortgage rates.

Now that we’ve seen the impact of cash rate on home loans, bear in mind that financial institutions are not required to take on the changes in cash rate, but not following it will do more harm than good. For instance, they may get a bad reputation should they fail to consider a cut in cash rate which means lower interest rates for the customers.

Cash rate is a crucial component on how much interest rate banks will charge customers on their home loans. That is why it is very important to understand the rates your bank implements, so you will have an idea of how high your repayments will be per month. You can likewise do your own research. Many websites of banks offer a home loan calculator that can give you an estimate of your monthly repayments. But since you can only get estimates, it is still better to seek help from a financial expert so you will know how to compare mortgage rates and choose what meets your requirements.

Got other tips on how to compare home loans and mortgage rates? Share your ideas in the comments section.

About the author  ⁄ Marxa Dillan

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