Understanding How Home Loan Interest Rates Are Set

Buying a home, especially for the first time, is a big step in life and is also a tremendous economic decision that will affect you for years to come, so if you educate yourself on all facets of mortgage interest rates, you will not only have the confidence in your decisions, but also the ability to watch the market and gauge how it will directly change your circumstances.

The Reserve Bank

The Reserve Bank plays a huge role in how your home loan interest rates are determined, which upholds the Reserve Bank Act (RBA) to make sure Australians are taken care of as far as the economy goes. Some of the responsibilities include the stability of the currency, economic prosperity and the maintenance of full-time employment rates. The RBA tries to maintain a low and stable inflation to ensure a prosperous Australian financial system.

Rising And Falling Cash Rates

Since interest rates are based on the health of the economy, the RBA plays a large part in your home loan interest rate. The Reserve Bank decides whether it must rise, maintain or lower the cash rate so that the economy is stable.
The factors that are considered include the unemployment rate, the ‘CPI’ or consumer price index, the ‘PPI’ or the producer price index, the current inflation rate and the levels of retail sales. The changing of the cash rate is used to promote spending and to encourage a long term economic growth rate in the future.
The Reserve Bank And Your Interest Rates
When you take out a loan, the official cash rate states the amount of interest that will be paid to the Reserve Bank by the different financial institutions. When your lender or financial institution borrows money to lend to you for your home loan, they borrow funds with a certain interest rate. In turn, you must pay off this interest rate plus the lender’s margin.

As the cash rate fluctuates, lenders will also raise or lower interest rates. Therefore, you can easily see that the economy does play a large part in your home loan interest rates. If you take out a mortgage during a rough economic period, you may have to pay a higher interest rate than during more prosperous times.

If you are keen to pay the lowest home loan interest rates, it is best to watch the market and research lenders thoroughly.