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What does the RBA interest rate really mean?



Have you ever wondered why the real estate industry seems to take an unhealthy interest in how much your mortgage costs at the beginning of every month?

Articles to do with interest rates begin to flood news feeds and fill up inches of newspaper columns at the start of each new month, as economists and industry spokespeople discuss and predict ‘where interest rates are headed’.

It’s become a monthly ritual of sorts – and it’s all because the first Tuesday of the month is the day that the Reserve Bank of Australia Board meets, to set its fiscal policy for the month ahead.

Why does the cash rate matter to you?

The official cash rate is the rate that the RBA charges banks to access funds, which they then lend to you, the consumer, at a higher rate. The goal of the RBA is to tweak the cash rate, to either stimulate or moderate the economy.

Think of it this way: if your mortgage costs you less, you’ll have more disposable income to spend and stimulate the economy.

When the RBA board meets, they make a decision about the official cash rate (OCR) in accordance with prevailing market conditions, and that decision goes one of three ways:

  • Keep the OCR on hold,
  • Increase the cash rate, or
  • Decrease the cash rate.

Right now, the cash rate is historically low at just 1.5%.

Most lenders presently charge between 3.5% and 4.5% to mortgage-holders, so they’re making a healthy profit of between 2% and 3% on every dollar they lend on home loans.

 Don’t get us started on unsecured debts: if you’re paying interest of 20% on a credit card, for funds the bank is acquiring for just 1.5%, then your bank is laughing all the way to the… well, bank. There’s a reason why banks post multi-billion dollar profits each year, right?

What impact do RBA interest rate changes have on you?

In 2016 we’ve been delivered two cash rate reductions, which means the amount that banks and lenders are paying for funds has been reduced from 2% to 1.5%.

This is great news for mortgage holders – in theory.

However, consumers didn’t get to enjoy the full benefit of those reductions, as many banks chose to pass on only part of the most interest rate reduction, so they could bolster their own balance sheets instead.

This was largely expected after APRA, the industry’s regulatory body, encouraged banks to reduce their exposure to investment loans, in an effort to cool Sydney’s booming market.

Banks were strong-armed into imposing stricter loan criteria on investor customers, in order to slow demand for capital city properties.

In the process of doing so, banks missed out on opportunities to make a lot of money – so it’s little wonder they chose to claw back some of those profits when the RBA slashed the official cash rate.

Looking ahead, many economists believe there are more rate cuts to come. NAB is forecasting two more 0.25% cuts in May and August 2017, down to a new low of 1%.

Whether you will actually see any cash rate savings next year remains to be seen, though one thing is clear: with so much competition in the mortgage industry, there’s never been a better time to negotiate for a better home loan deal.

Do you want to find the best interest rate for you? Use our calculator and get personalised quotes direct from lenders in just 2 minutes.