If you’ve been following the news – we’ll forgive you if not, True Detective has been particularly crazy this season – you’ll likely have heard that the Reserve Bank of Australia (RBA) chose to keep interest rates on hold at the record low 2% cash rate.
And if you’re shopping around for a home loan, interest rates are one thing you’ll have your eye on: they determine the cost of your home loan and what you pay back each month.
So if the RBA has kept interest rates at 2%, what does that mean for my home loan? And who is the RBA? And what do the banks have to do with them?
Who is the RBA?
The RBA is Australia’s banking authority. You can’t go to them for a home loan or a credit card, but they do provide the Australian government and other banks with financial services and advice. Essentially, they’re an impartial authority that’s supposed to help the Australian population financially.
What does the RBA do and how does it affect me?
The RBA has a number of roles and responsibilities, but they’re generally making headlines in relation to setting the interest rate, or the cash rate. This happens on the first Tuesday of each month, and then lenders can set their own variable interest rates, which are currently in the range of 4-5%. The cash rate set by the RBA can be best described as a rough benchmark for lenders – but it’s ultimately up to them how they choose to set their interest rates.
When demand for finance is weak, lenders drop their interest rates, much like a department store does after Christmas. When demand is strong, they’re able to boost their fees, because that’s how capitalism works.
How are fixed interest rates set?
If you’re buying your first home, you’ll have the option of taking out a fixed-rate home loan or a variable rate home loan. Banks get free reign over these, and the RBA’s cash rate doesn’t come in to play.
So how do they come up with this elusive interest rate? Fixed rates are based off something called a Bank Bill Swap Rate (BBSW). The BBSW changes all the time, and naturally, the banks then review their fixed rates. But if you do take out a fixed-rate home loan, you won’t be affected by the changes, as you’ll be locked in to that rate.
Do investors get a separate interest rate to that of owner-occupiers?
Previously, if you were an investor looking for the best home loan rate, you’d get exactly the same rate as someone looking for a McMansion to raise their family in Castle Hill. This has begun to change over the past couple of months, with most banks having different rates for investors. So what’s the difference? The interest rate for investors is generally higher, a result of a clampdown on investor landlords. These changes have come after the Australian Prudential Regulation Authority (APRA) forced banks to slow down their loan growth, which means banks and lenders are tightening their lending criteria like never before.
Keeping on top of changes to interest rates is important for any first homebuyer or investor. With a bit of forethought and guidance about what’s right for you, you’ll be well placed to purchase a property with confidence and a clear understanding about the cost of your home over the length of your loan.
Now that you’re clear on interest rates, find out how your credit score can affect the cost of your home loan.