How does the cash rate affect your home loan?

03 Feb How does the cash rate affect your home loan?

The home loan rate you get is influenced by the Reserve Bank of Australia (RBA).

RBA recently has kept its official interest rates on hold which is still at 0.10%. This may be a relevant news for some people who have a grasp in the finance industry, but for some, it can get a little too overwhelming.

I have published an article before where I discussed about RBA and its role. Just to refresh, RBA stands for Reserve Bank of Australia and is a statutory authority—meaning, it’s a body set up by law (see Reserve Bank Act of 1959) which is authorised to enact legislation (cut interest rate, for instance) on behalf of the relevant country or state (in this case, Australia).

RBA is Australia’s central bank. It lends money to commercial banks (such as your bank) and offers a rate. This is the official cash rate. Now that article may appear too broad as I’ve only described RBA’s general role and how it affects your mortgage. In this entry, let me specify the ways on how you can potentially make the most out of your interest rate (home loan rate set by your bank) regardless of the RBA cash rate.

Banks and other lenders all over the country use the RBA’s official cash rate as the benchmark for the rates they offer. The Reserve Bank will lower the interest rate in order to stimulate growth. The interest rate is basically the cost of money so a low interest rate will reduce the cost of borrowing for you. A possible outcome is that you will have greater access to funds and will, therefore, increase your spending, which helps the economy.

If you have a home loan, low cash rate means you will be paying slightly less on your mortgage. But what about the possibility of RBA increasing the cash rate in the future? Whilst the cash rate or the economy performance is beyond your control, there are some ways where you can minimise the impact of shifting interest rates on your mortgage.

• Consider a fixed rate loan. – This will protect you from interest rate rises in the future.
• Use an offset account. – This is a transaction account linked to your mortgage. It lessens the amount you have to pay towards your mortgage interest. If you have $30,000 in your offset account and you have a mortgage of $500,000, your interest will be based on the balance of $470,000. The more money you have in this account against your mortgage, the less your interest will be.
• Make extra repayments. – Add extra amounts on top of your monthly payment. This pays off your debt faster as the payment goes towards your current loan amount.
• Switch lender. – Don’t be afraid to move to a new lender. This will give you a chance of finding for a more competitive interest rate. Actually, the key here is communication. Ask question and demand for a better deal.

Now that you have an idea of the effect of cash rate to your home loan, consider keeping up with your home loan and check if your current deal is still meeting your needs. If you require further assistance or might have some questions not covered in this article, feel free to give me a call on 0408 081 082.

Source: http://www.rba.gov.au/monetary-policy/about.html

Disclaimer:

Credit Representative Number 486927 is authorised under Australian Credit Licence 389328.

This article provides general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances and your full financial situation will need to be reviewed prior to acceptance of any offer or product. It does not constitute legal, tax or financial advice and you should always seek professional advice in relation to your individual circumstances. Subject to lenders terms and conditions, fees and charges and eligibility criteria apply.