How does the official cash rate affect your home loan prospects?

By the resi financial blog team, 04 September 2013

How does the cash rate affect my home loan

It's important to remember that property finances, whether they're a fixed or variable home loan, don't exist in a vacuum. There are a number of outside influences that can affect your repayments, as well as the circumstances surrounding taking out a loan.

One of the biggest influences, however, is the Reserve Bank of Australia's official cash rate. This organisation is responsible for monitoring the state of the nation's economy, and has the capacity to control inflation through the raising or lowering of the cash rate.

At its core, the cash rate is used to dictate the interest rate that financial institutions have to pay in order to borrow or charge to lend funds.

Basically, the lower the cash rate the less the banks have to spend on lending out to their customers. This usually translates into cheaper interest rates for those organising home loans.

This could be fantastic news for anyone looking for the cheapest variable rate home loan available. Taking the time to watch the official cash rate and the subsequent drops in interest rates for home loans can help you to secure a great deal.

However, the reverse is also true. If the official cash rate is increased, the chances of interest rates for borrowed money increase as well. This is due to the growing cost to the banks to lend out money.

People who have a variable rate home loan have far more reason to be wary of any changes to the cash rate. Unlike a fixed rate, their home loan interest rates are influenced by the market activity. As it increases, their repayment amounts could potentially grow as well.

The Reserve Bank of Australia makes a cash rate decision every month, so if you're considering purchasing property in the near future, it could be a good idea to pay attention and try to secure yourself the best home loan deal possible.

Categories: Financial Services, Personal Finance