The Reserve Bank of Australia is the country’s central bank, which means it manages Australia’s currency and monetary policy. One of the essential responsibilities of the RBA is to set the cash rate for all overnight loans between banks.
What does the RBA cash rate change mean, and how does it affect your mortgage? Keep on reading to find out.
What Is the RBA Cash Rate?
The RBA cash rate refers to the interest rate banks pay each other on overnight loans. It is the Reserve Bank’s primary tool to set monetary policy for the Australian economy.
The RBA sets its cash rate target at the end of each month. The decision then gets passed on to the Reserve Banks in each state, passing this on to the banking industry.
When the RBA cash rate increases, the banks will pass this on to mortgage holders to make new home loans.
Why Does the RBA Change Cash Rates?
The RBA cash rate is primarily set to control how much money circulates in the economy at any given time. This is based on the belief that the economy works best when there is a balance between supply and demand.
If there is too much money in the economy during a period of growth, it will mean inflation will start to increase. If there is not enough money in the economy, then there is a risk that it might result in deflation (falling prices).
If you look at the current economic situation in Australia, the RBA cash rate has now been at the same level since 2016, at 1.5%. This is because the Reserve Bank of Australia would like to see more money coming into the economy to drive aggregate demand and economic growth.
How Do Cash Rates Affect Mortgages?
Now that you know how the RBA cash rate is set, you can understand how it affects your mortgage.
To determine how your mortgage will be affected by the new RBA cash rate, you need to look at your mortgage rate or home loan rate. This is the interest rate you pay to the bank for your home loan.
Cash Rates and Variable Rate Mortgages
If you have a variable rate mortgage, your home loan interest rate will be the same as the RBA cash rate on the day you made your loan. This is because variable-rate mortgages have an interest rate that moves with the cash rate.
If the cash rate increases, the variable rate on your home loan will also increase. This means that your home loan interest rate will also increase. If the RBA cash rate decreases, so will the variable interest rate on your home loan.
Cash Rates And Fixed-Rate Mortgages
If you have a fixed-rate home loan, your interest rate is not likely to change. This is because, by definition, fixed-rate home loans have an interest rate that is fixed for the entire term of the loan.
For example, if you have a home loan with a fixed rate of 4.5%, and the RBA cash rate increases to 5.5%, your interest rates will increase. However, if the RBA cash rate decreases to 1.5%, your interest rate will stay at 4.5%. You don’t need to worry too much about the changes in the RBA cash rate on your fixed-rate home loan.
Understanding how the RBA cash rate affects your home loan interest rate is very important. By being well-informed, you can stay on top of your repayment responsibilities.
Learn more about mortgage interest rates by working with the mortgage brokers at FinanceCorp. All of the Finance Managers at FinanceCorp are fully qualified, trained, and experienced mortgage professionals who live and breathe finance. When you work with us, you can rest assured that you can get the best loan for your needs. Call us today for more information.