GUIDES & RESOURCES

Official cash rate

While home buyers are often on the lookout for low interest rates on their home loans, there’s another rate that can influence it, and it’s a big deal: the official cash rate.

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What is the official cash rate?

The official cash rate is a benchmark number that’s set by board members of the RBA who meet each month. It indicates the rate on funds that banks lend to each other each day so they can meet their daily requirements.

But it’s not just a number for lending institutions – the official cash rate influences many things such as:

  • Home loan interest rates;
  • Currency exchange rates;
  • Savings accounts; and
  • Managing fiscal policies.

The RBA decides whether the cash rate will drop, increase, or stay the same. Any changes to the cash rate are made in 0.25% increments, although in 2020 the cash rate dropped by 0.15%.

Why does the cash rate change?

Changes to the official cash rate affect many parts of our economy such as how we spend and invest our money. It can also affect employment and inflation.

When our economy is strong and there’s a lot of demand for goods and services, the RBA may choose to raise the cash rate so that our economy doesn’t become inflated.

But when our economy takes a hit and demand is lower than usual, the RBA may choose to lower the cash rate to encourage people to keep spending and investing, which typically boosts a lagging economy.

You can visit the RBA website for monthly statements which explain the reasons behind the board’s decision each month.

What influences the official cash rate?

The RBA seeks to maintain the status quo in every decision for the following guidelines:

  • Keeping the Australian currency as stable as possible.
  • Maintaining and encouraging full employment in Australia.
  • Encouraging economic prosperity and welfare for all Australians.

This means that when the RBA sets the cash rate each month, their decision is influenced by a range of economic factors such as:

  • The state of inflation;
  • The state of the Australian dollar;
  • The rate of unemployment;
  • The housing market;
  • Australia’s Gross Domestic Product (GDP).

How does the official cash rate affect home loans?

Banks and lending institutions consider the cash rate when they set their home loan interest rates. It may be helpful to look at the cash rate from a lender’s perspective: ‘the cash rate is the interest rate on unsecured overnight loans between banks’.

So, if there are changes to the cash rate, then people with a mortgage may also see changes in their monthly home loan repayments.

Banks and lending institutions don’t always change their customer’s home loan interest rates based on the changes to the cash rate. Sometimes, particularly if the cash rate doesn’t change at all or changes minimally, lenders may leave interest rates on home loans as they are, or even reduce them.

Lenders may change alter interest rates without the cash rate changing to account for increasing costs of business, to be competitive with rival lenders, and to increase profit, among other reasons.

Is it worth paying attention to the cash rate if I’m applying for a home loan?

Yes, it can be helpful, especially because a lower cash rate can influence interest rates to be lower. When this happens, there’s often a boom in the property market, as demand increases for people to take advantage of lower interest rates.

Having even a small drop in your home loan interest rate can mean that you could save hundreds or even thousands in your repayments over your total home loan term.

Refinancing is a great way to take advantage of interest rate drops in the market. With iSelect and Lendi, you can compare a range of home loans, rates and features, and potentially switch to a more competitive product.

What could an increase in the cash rate mean for my home loan?

If you have a fixed rate home loan, then any increases in the cash rate generally won’t affect your repayments, if you’re still in the fixed interest period. If you have a variable rate home loan, then it’s possible that your lender could increase the interest rate on your repayments.

What could a decrease in the cash rate mean for my home loan?

If you have a fixed rate home loan, then you won’t be able to see any reductions in your monthly repayments if you’re still in the fixed rate period.

However, if you have a variable rate home loan, then it’s possible your lender could drop the interest rate on your home loan as a result of the cash rate drop. If your lender doesn’t do this, then you might take this as an opportunity to compare other home loans on the market and refinance.

Where can I compare home loans?

At iSelect we’ve partnered with Lendi to try and make it easier to find a great deal on your home loan. Click here to get started comparing from a range of lenders online, or give Lendi a call on 1300 186 260.

Last updated: 15/03/2022

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