What does the cash rate have to do with your home loan?

If you keep an eye on the news, you have probably seen a few headlines about the historically low cash rate remaining at 0.10 per cent.

Despite the growing speculation that the cash rate will soon increase, this historic-low level of 0.10 per cent hasn’t changed since November 2020, and it is said to remain at that rate for the foreseeable future.

But what does the cash rate have to do with your home loan, you must be wondering.

Before we answer that question, let’s review the basics, shall we?

What is the cash rate?
The cash rate, also known as the official interest rate, is the interest rate for borrowing in the cash market, which is a market where commercial banks can borrow and lend cash to each other overnight.

The Reserve Bank of Australia (RBA) is the one responsible for setting the official interest rate for Australia. On the first Tuesday of every month, the RBA meets to discuss whether the official rate should be increased, decreased, or kept as it is.

The decision to increase, decrease or keep it as it is, is influenced by several items such as inflation, employment, economic growth and the international economy.

The cash rate is an essential tool for managing monetary policy, as it influences rates on savings and loans and it ensures that prices for goods and services don’t rise too quickly.

When the economy is strong and demand is high, the RBA might decide to raise the cash rate to slow things down and ensure inflation is under control. On the other hand, if the economy is weak and demand is low, the RBA might lower the cash rate to encourage spending and investment, giving the economy the push it needs.

Now that we have reviewed the basics, we can find out how it affects your home loan.

How does the cash rate affect home loans?
While the cash rate has no direct impact on home loan interest rates, it is still one of the main factors banks take into account when they set their own interest rates.

The lower the cash rate, the lower the interest rates could be for new home-buyers, investors and refinancers. However, a rise in the cash rate could mean home loan rates going up as lenders absorb the increased cost. An increase or decrease in interest rates could translate to a sizable reduction or raise in borrowers’ repayments.

The good news is that with record-low rates on hold for the moment, competitive terms are still available to borrowers for the time being.
UFinancial deals with multiple lenders every day. We keep up-to-date with regularly moving interest rates and new products, making it easier to find the right deal to your unique situation.

Talk to of one our brokers today.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute financial advice. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own circumstances and seek professional advice.