How does the RBA cash rate affect home loans and mortgages?

Do you have a property in Brisbane or are planning to invest in one? Did you know that the home loan rate you get is influenced by the Reserve Bank of Australia (RBA)? As mortgage brokers and experienced finance lenders at i Lend Finance Solutions we know it can all get a bit overwhelming with so many things to think about when it comes to mortgages and home loans, so in our blogs we hope to impart some tips and ideas that can make your experience with them less hassle. In this post, we answer the question:  How does the RBA cash rate affect home loans and mortgages?

What is a cash rate?

This is the interest rate set by Reserve Bank of Australia (RBA) that banks then pay or charge to borrow funds from other banks in the overnight market.

Banks lend money to other banks each day to manage daily cash needs. Given that these are loans for the shortest term, they are known as “overnight” funds and the interest rate charged is an overnight rate.

Every month, except in January, the RBA board meets to decide on the most appropriate monetary policy for Australia’s economic environment. The decision to alter the cash rate, or leave it on hold, is influenced by a range of economic factors – including inflation, the performance of the Australian dollar, the state of the housing and lending markets, the country’s gross domestic product (GDP) and consumer and business confidence.

The cash rate is generally the lowest interest rate at which banks borrow from each other and it serves as a benchmark rate in the country.

Financial institutions then follow suit and can make changes to their interest rates accordingly. Changes to the cash rate affect the economy as a whole especially the housing market because mortgage rates generally follow the cash rate.

However, it’s common that even if the Australia cash rate may be 2% at the time that homeowners might be charged 5%, this is because financial institutions only used these cash rates as a basis. If your mortgage is set at a fixed rate, you won’t receive any rate cuts from your lender during the fixed term. Likewise, you’re also protected from rate rises for the same term.

What can you do to minimise interest regardless of the RBA cash rate?

While there isn’t much you can do to control the cash rate or the economy, there are some ways you can minimise the impact of fluctuating interest rates on your home loan.

  1. If you haven’t already, now might be a good time to consider switching at least part of your mortgage to a fixed rate, which will protect you from interest rate rises for the fixed term period
  2. Use an offset account. This is a special type of transaction account that is linked to your mortgage, and you can use it as you would any other account. The main difference is that the amount in this account lessens the amount you have to pay towards your mortgage interest. If you have $50,000 in your offset account and you have a mortgage of $700,000, your interest will be based on the balance of $650,000. The more money you have in this account against your mortgage, the less your interest will be.
  3. Some lenders allow you to make extra repayments against your home loan. This is when you pay not just the loan repayment due for the payment period, but add in extra amounts. This pays off your debt faster as more of your payment goes towards the outstanding loan amount and less goes towards the interest due. Paying your loan off faster means you’ll pay less interest over the duration of your loan. However, remember that this option may not be available for most fixed rate home loans.
  4. Find a better interest rate (or cheaper) by considering to move to a new lender. Many offer introductory rates that make the change easy, but make sure that rates after this period are still reasonable and meet your needs. Another way is to ask your current lender for a better deal, such as a discount or fee waiver. You can also ask them to give you a better loan to avoid the costs of refinancing.
  5. Pay on time.Interest builds up when you miss a payment, and you’ll end up paying for more than what you actually owe. Paying on time keeps you within budget. Also try to avoid refinancing to longer loan terms, as even though this can reduce the cost of your repayments, it can increase the interest you pay over the life of the loan.

In a nutshell, the best course of action that anyone can take is to keep on top of home loan and mortgage payments, and shop around for the best interest rate possible, with a home loan that has the features and flexibility you need. If you are ready to take the next step and purchase a new home or property, let us at i Lend Finance Solutions compare current interest rates on offer for you and help you make the tough decisions when it comes to finding the right loan to suit your unique set of requirements and lifestyle.  Contact us on 0455 500 554 or info@ilendfs.com.au


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