Last year we saw interest rates start to rise following the Reserve Bank of Australia’s decision to increase the cash rate for the first time in over a decade. With high household debt levels in Australia, the cash rate increase had a knock-on effect for millions of homeowners as regular mortgage repayments increased.
Here’s a quick guide to answer your questions about what this all means and why it’s happening.
What is the RBA and what do they do?
The Reserve Bank of Australia (RBA) is Australia’s independent central bank. The bank conducts the nation’s monetary policy and issues its currency1. The RBA determines the cash rate which impacts other market and institutional interest rates.
What’s the official cash rate?
The official cash rate sets the interest rate for overnight transactions between banks. It’s a tool used by the RBA to influence economic activity and manage inflation.
An increase in the official cash rate generally means an increase in the cost of borrowing money. So when the RBA changes the official cash rate, the banks tend to follow suit and change their lending rates.
How do banks set interest rates?
The official cash rate isn’t the only factor that influences bank lending rates, but it’s one of the most important.
To make money, banks need to lend money out at a higher rate than they borrow – this is why the interest rate you receive on your savings account tends to be lower than the interest rate you pay on your home loan. So an increase in the cost of borrowing money can affect you in different ways, depending on whether you’re a saver or a borrower.
If you have a savings account or you’re thinking of taking out a term deposit, you could start to receive more interest on the money you’ve lent to the bank. But if you have a home loan you could start to pay more interest on the money you’ve borrowed from the bank.
Why are interest rates rising?
The RBA is looking to control inflation in a bid to stabilise the Australian economy, which is seeing higher prices, lower unemployment and signs of potential wage growth.
What do rising rates mean if you have a home loan?
If you have a variable rate loan or your fixed rate loan is about to reach the end of its term, you may find your repayments increase and you have less discretionary income to spend on other things. The way you structure your home loan could help you pay less interest in the long run and take years off your mortgage.
As we see rates increase, it’s a good idea to think carefully about what type of loan best suits your needs – fixed, variable, or split. It’s a big decision and could have a significant impact on your future repayments and household budgeting as rates rise.
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If you're worried about your home loan repayments increasing or experiencing financial stress, please let us know. The best thing you can do is to reach out early, as soon as you're able. We will listen, take the time to understand your situation, and support you to sort through the challenges.
There are many ways we may be able to assist, and we're here to talk through the options with you. You can call us on 13 30 30 any time from Monday to Friday (8am to 8pm), or Saturday and Sunday (9am to 5pm), Sydney time or email us at firstname.lastname@example.org.
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