When the interest rate on your home loan fluctuates, it can feel as though you don’t have control of your debt. Despite being frustrating, interest rate changes are a part of every loan lifespan and warrant your consideration.
The interest rates that banks charge on their home loans are influenced by the Reserve Bank of Australia’s (RBA) cash rate, by competition and by a number of other factors including regulatory intervention. However, lenders can and do raise or lower their variable and fixed mortgage rates independently to the RBA’s cash rate changes.
The way the relationship between the cash rate and interest rates usually works is that the cash rate is reviewed by the RBA on a monthly basis in order to safeguard Australia’s economic stability. The cash rate is the rate charged on loans made between the RBA and your lender. This, in turn, can have a very strong impact on the interest rates your lender charges you.
“The RBA supports the banks with liquidity facility,” explains Advantedge General Manager Brett Halliwell. “The RBA is a bank to the banks. The cash rate is effectively the rate at which the RBA will lend to the banks, and what the banks effectively use as a reference rate for other things.”
When the cash rate is changed by the RBA, lenders decide whether or not to mirror the new rate in the interest they charge their mortgagors, that is, borrowers.
This is entirely up to the lender in question and depends on the market and how the lender is performing at the time of the cash rate change.
“If you look at the mortgage market, specifically by itself, it is very much a competitive market,” Halliwell says. “It is about the lender trying to get the right outcome on the deposit side of the balance sheet within the context of a very, very competitive marketplace, but recognising that a reference rate has changed and, therefore, looking at where they stand.”
Some lenders choose to keep their interest rates higher than the RBA’s cash rate and, in these instances, other lenders may be offering lower interest rates than the one you currently have.
Keeping track of how your lender manages cash rate changes and where that leaves you as the person paying the interest can be time consuming, and is made more difficult by fees, charges and the flexibility offered by different loan products, which all need to be weighed alongside the interest rate.
A simple way to regain control of your interest rate is to consider locking it in for a period, if you believe rates are not likely to fall further in that period. Fixed rate loans can incur substantial ‘break’ costs if you decide to sell or refinance. Fixed rates offer less flexibility, but more certainty.
Being familiar with the different lenders and their responses to cash rate changes and tracking interest rate fluctuations across a panel of lenders ensure you’re getting the best possible deal. Make sure your mortgage broker is doing this for you.