It’s crucial to understand the relationship between the changing RBA cash rate and your home loan for effective mortgage management and making informed financial decisions.
However, many homeowners may be unsure about the impact of cash rates on their home loans and their own interest rates, particularly with the rates changing every month as they are at the moment.
Ultimately, the rate changes affect mortgage repayments, and knowing how to navigate fluctuations and being on top of changes in the RBA’s monetary policy can help. Plus, current cash rates also affect anyone looking to borrow money now or in the future.
But first, of course, it’s essential to know exactly what the cash rate is, so let’s start there.
What is the RBA Cash Rate?
The Reserve Bank of Australia sets the RBA cash rate, also known as the “official cash rate.” This interest rate acts as a benchmark for the rates charged by banks and other financial institutions throughout Australia.
The RBA adjusts the cash rate to manage inflation, economic growth of the Australian Dollar, and financial stability in the country.
With current changes occurring across the nation, many Australian homeowners are wondering how these rate changes may impact their home loans.
Since May 2022, the RBA has increased the cash rate from 0.10% to 3.60%, an increase of 3.50% till March 2023. The RBA decided to hold the cash rate in April, but some still forecast rate increases throughout the remainder of 2023.
What Impacts Cash Rate Changes?
Raising and lowering cash and interest rates benefits economic growth by maintaining stability in our currency and avoiding rising inflation.
The decision to increase or decrease rates depends on key elements, such as:
- The growth of our economy: The RBA can choose to decrease the cash rate target if our gross domestic product (GDP) falls too low and the value of Australian-produced goods and services declines, as this will encourage consumer purchasing and stimulate the economy.
- The growth of wages and employment: Slow growth in wages often indicates slow economic growth.
In this instance, the RBA may elect to keep the cash rate the same. If wages and employment levels decline, the RBA may decrease the cash rate in order to create more jobs and stimulate more investments.
- The growth of inflation: A key goal for the RBA is to maintain inflation rates between a target range. If and when inflation reaches above that target range, the RBA will be more inclined to increase rates as well.
Several other factors can impact interest rates, such as conditions in the financial and housing market, changes in competition, and the risk associated with various types of loans.
Changes in competition among banks and other lenders can also impact rates as they adjust theirs to attract borrowers.
Additionally, the risk associated with different types of loans, such as the level of risk associated with a particular borrower or the type of property being purchased, can also influence interest rates.
Many factors play a significant role in determining interest rates. Therefore, it’s essential to consider as many as you can when making financial decisions related to home loans or borrowing money in general.
How Does the RBA Interest Rate Affect Home Owners?
When the Reserve Bank of Australia decides to lower the official cash rate, it’s likely that lenders will follow suit and lower their interest rates too. This means borrowers can enjoy lower mortgage repayments and higher purchasing power.
Individual lenders might not always pass on the full amount of the RBA rate cut to borrowers, so it’s always beneficial to shop around and compare different loans when looking to borrow funds.
However, when the RBA increases the cash rate, lenders also tend to increase their interest rates, causing higher mortgage repayments for homeowners.
If you’re on a variable rate loan, any changes in the cash rate will directly affect you. In such cases, you may see an increase in your monthly mortgage repayments, and it can also lead to a longer loan term.
And for those with a fixed rate period for their loan and a predetermined interest rate, the cash rate can still have an indirect impact.
When the loan term ends, or for borrowers looking to refinance, the current rate will influence their future fixed rates. In these cases, borrowers may be offered a higher or lower interest rate.
Will We See More Cash Rate Increases?
It’s not just Australian-based factors that cause cash rate increases. needs
Factors such as supply-chain problems, the conflict in Ukraine, and changes in consumer behaviour after COVID-19 have contributed to the increasing inflation rate, which, in turn, has impacted our national cash rate.
However, with so many variables affecting the RBA’s decision, it can be challenging to predict whether rates will continue to rise. Some economists believe that there may be a few more increases before they start to fall again.
For this to happen, however, certain conditions must align. For example, a continual increase in unemployment and a weakening economy need to occur.
In the meantime, there are a few things you can do to protect yourself from the impact of these changes.
Tips for Navigating Cash Rate Changes
If you’re looking to manage your mortgage in response to the continual fluctuations, here are some strategies you can consider:
- Stay informed about potential cash rate changes by keeping an eye on the RBA’s announcements and updates. This will help you understand how these changes may affect your home loan.
- Shop around for different lenders to see if you can refinance. Refinancing might help you obtain lower rates and mitigate the risks of higher repayments.
- Consider paying extra on your home loan if you’re able to. This can help you save money on interest rates and shorten your loan period by several years.
Australian homeowners and potential homebuyers can greatly benefit from understanding how the Reserve Bank determines the national cash rate and the impact that has on their loan.
Staying informed about the RBA’s actions, regularly reviewing your loan, and adjusting your repayment strategy can help you stay on top of any challenges that arise.
If you need additional support in managing your home loan or if you’re looking to borrow money for a loan, contact The Mortgage Agency to talk to an expert mortgage broker.