The cash rate in Australia is the market interest rate on the overnight loans between different financial institutions. The Reserve Bank of Australia (RBA) monitors and alters this rate. They will either increase or decrease the cash rate by a measure of ‘basis points’ to manage inflation and economy.
Impact On Mortgages
The rate change is important for its effect on mortgages. The RBA’s cash rate has a strong link to the interest rates charged by the financial institutions on loans to its customers. Variable rate loans are particularly affected by this rate change. If the cash rate rises the interest rate charged by the banks will move in same direction and the same will happen in case of a rate cut. When you are taking a loan, it’s important to research different home loans and interest rates on Home Loan Comparison.
Are the banks in Australia obligated to change their interest rate in tandem with the changes the RBA makes? Not necessarily, but it is in their interest to follow the RBA cash rate change. If a bank does not pass on a rate cut to its variable rate loan customers, they are likely to lose the customers as also dent their image.
How Are Home Loan Borrowers Affected By A Rate Change?
If you have a home loan with a variable interest rate, you are tracking the changes in interest rate charged to you as your monthly payment changes. The rate change is not linear meaning it can go up or down. That will either increase or reduce your monthly payments. In case of a rate cut you may feel happy that you will be saving on your monthly payments. But don’t forget that your superannuation and savings account interest rates may see a reduction too; so it works both ways.
Points to Consider
Global financial crisis has increased the cost of borrowing for banks. They absorb the rise in interest rates up to a point where their profitability is not adversely impacted. Similarly, they may not hasten to pass on the rate cut to customers. So they may at times ignore the RBA rate changes.
Rate changes is a complex issue. Instead of relying rely on the rate change impact on your home loan, it will benefit you to be regular in your monthly payments and watchful by shopping around for a better interest rate on Home Loan Comparison. Alternatively, consider switching to a fixed rate loan to stabilise your monthly payments for rest of the life of your home loan.