How interest rates are determined in Australia
In Australia, the interest rates used to calculate mortgage repayments are guided by the official interest rates set by the Reserve Bank of Australia (RBA). The RBA will change interest rates from time to time in order to control inflation. Here we look at interest rates including why they might rise or fall and the different interest rates that apply to home loan mortgages.
Get Pre-Approval online & get a response in minutes with MyRate.
Why the RBA changes interest rates
The Reserve Bank of Australia (RBA) has control over the official interest rate in Australia. But while the official interest rate will be different to the going interest rate available on mortgages and other loans, the official interest rate has a large bearing on the interest rates that apply to credit such as mortgages.
The RBA uses official interest rates to keep inflation under control. Generally speaking, the RBA sees Consumer Price Index (CPI) increases of three percent or more of an indication that inflation is getting out of control, so the RBA will use interest rates as a tool for controlling inflation. If inflation is rising, the RBA can increase interest rates in order to slow consumer spending. This is because when Australians' mortgages increase, they are less likely to spend more money or borrow extra money for personal loans.
Conversely, when the economy is experiencing a downturn and consumers are not spending enough, the RBA may reduce interest rates in order to encourage Australians to spend more as they will be spending less each month on repaying their mortgages.
Why are there different interest rates?
Different home loans will have different interest rates. This is because there is great competition within the home lending market and because there are basically two types of home loans: standard variable rate home loans and fixed rate home loans.
Standard variable rate home loans are usually lower than fixed rate home loans because they will rise or fall with changes in the official interest rates set by the RBA. So, if official interest rates rise, so to will the standard variable rate on a mortgage. Fixed rates however are set for a fixed term, usually between one and five years. This means that if official interest rates rise, the borrower will still be paying the lower interest rate for the remainder of the term. For this reason, the lenders will increase the rate of a fixed rate loan in order to account for any possible future interest rate increases.
Learn more about fixed and standard variable interest rates
To find out more about fixed rate and standard variable rate home loans, visit our home loan resources page.
Alternatively, you can use our home loan interest rate calculator to determine your monthly loan repayments using different interest rates.
Digg this Post page to del.icio.us Post page to Furl
