How do interest rates affect you?

If your looking to buy an investment property or saving for your first home, you need to be aware of the RBA’s interest rate and how it affects the economy. But mostly what does it mean for you?

What is the RBA?

The Reserve Bank of Australia is a body corporate. It’s owned by the Commonwealth of Australia. The RBA is Australia’s central bank and its main role is to maintain the stability of our country’s financial system.

The RBA’s public face is made manifest through its role in setting the cash rate. This cash rate is announced after each RBA board meeting, which is held once a month the exception being January.

What is the RBA interest rate? 

A common misconception is that the RBA interest rates dictates the interest rates individual banks set for their loans etc personal loans, home loans and business loans. That’s not the case. In fact, the RBA interest rate actually affects overnight loans in the money market.

This has some effect on the banks, because banks often need to take out overnight loans to help fund various transactions.

A low RBA interest rate or also known as ‘cash rate’ theoretically drives more business by banks who know if they need to take out a loan to fund their own transactions, there won’t be a large interest rate attached.

So if a bank is offering a low cost loan, they’re more likely to take risks through lending to more businesses and individuals this is done to drive the circulation of money through the economy.

How does a static interest rate affect you?

As a first home owner

When interest rates are unchanged, you can enjoy some relative stability that comes with a static cash rate. In turn you can use this stability and lending confidence to extend upon your equity to in turn, reinvest it.

This has some influence on property prices in Australia, because homeowners invest equity into renovations. This drives up the price of their home or can be invested into additional properties for investment.

If you’re saving for a home

If you have noticed the interest rate on your savings account has been dropping off in the last few years, you’re not alone. You might have noticed that saving for a deposit is more difficult. Housing affordability is a major concern for new home owners and the board of the RBA.

While a static cash rate gives lenders some confidence, you might still find it easier to secure a loan than if the cash rate had gone up.

When the cash rate stays the same

When the RBA cash rates are unchanged month on month, this can have the biggest influence on creating or maintaining consumer and lending confidence.

Any deviations in the cash rate up or down create speculation and some uncertainty in the market as to what has motivated the RBA to make the change.

How does an increased interest rate affect you?

As a first home owner

An increased interest rate runs the risk that it will affect new home owners because their monthly mortgage rates can increase. If you’ve taken out an interest only loan in the hope of entering the property market, a higher interest rate can increase the risk of your ability to manage your cash flow and maintain your ability to pay back your loan.

When the cash rate goes up

Rising interest rates can potentially constrain the finances of anyone already on the property ladder. However this rise can also have a positive effect and can help potential home owners save. If the RBA decides to increase the cash rate, this can result in increased interest rates on savings deposits so it’s not all bad. If you’re saving for a house, you may actually want an increase to the cash rate because it will curb spending in the wider economy.

How does a decreased interest rate affect you?

If you’re saving for a home

If you’re saving up to purchase your first home or looking to buy an investment property, a decrease in the cash rate is not always good news. It depends where you’re at with your savings, because you may see a decrease in your savings account’s interest rate return. However if you’re close to your savings goal, you could be in a good position to enjoy the benefits of lower loan rates.

As a first home owner

You can expect for any cuts to the interest rate to be passed onto you through your lender’s decreasing mortgage rates. When rates go down, your lender can choose to reduce their mortgage repayment amount or keep your mortgage repayments as they were. If this occurs, you may enjoy some substantial savings in your interest costs. Be wary though history shows that the banks do not always pass on these savings, but may choose to increase mortgage rates in answer to surging house prices.

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How do interest rates affect you?