Having an understanding of how home loan interest rates are determined can help you when entering the real estate market and buying your first home or investment property.
As a first time property owner, the fluctuation of these rates over time can impact your ability to service a loan so it’s important to know how and why they change and formulate a plan for how to budget for this.
In Australia our Reserve Bank sets a cash rate. This is the interest rate they will charge commercial banks for loans. The decision to increase or decrease the cash rate is influenced by factors including consumer confidence, business confidence, the property market and the performance of the Australian dollar.
Commercial banks will often alter their interest rates in line with any changes put out by the Reserve Bank. For example, if the Reserve Bank increases the cash rate, your bank will likely increase their interest rates and borrowing becomes more expensive. If the cash rate falls, commercial banks will often (not always) decrease their interest rates and borrowing becomes cheaper.
In an economy like Australia is currently experiencing, home loan interest rates are low and mortgages will feel more affordable as the interest portion on your repayments is less. When organising home loans it is well worth investigating if a portion of that loan can be fixed to take advantage of the low interest rates.
Consumers looking to borrow should always consider what will happen to their ability to repay a loan when interest rates inevitably increase.
And for those whose interest has been piqued and you’d like to keep across the Reserve Bank’s movements, they meet on the first Tuesday of each month – January excluded – to decide whether to change the cash rate. Any moves are made in 0.25% increments.
For more information on this topic, you can leave a message for me here or call me on 0419 799 979.
