Have you ever wondered why home loan interest rates fluctuate over time?

In this article, we dive into how the cash rate affects mortgage repayments, what the Reserve Bank of Australia (RBA) is responsible for and what factors impact cash rate decisions.

- __Related:__ [How to save on your mortgage when interest rates rise](https://www.lendi.com.au/inspire/finance/interest-rates-are-rising-how-to-save/)
- __Related:__ [7 ways to prepare for an interest rate increase](https://www.lendi.com.au/inspire/finance/how-to-prepare-for-an-interest-rate-increase/)
- __Related:__ [Rates are rising – should you fix or split yours?](https://www.lendi.com.au/inspire/finance/rates-are-rising-should-you-fix-or-split-yours/)

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## What is the RBA responsible for?

The cash rate is decided each month by the RBA, Australia’s central bank. 

Its role is to set and implement monetary policy that ensures the Australian economy remains stable and healthy.

The cash rate is described by the RBA as ‘the interest rate on unsecured overnight loans between banks’. 

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## How does the cash rate affect home loan interest rates and repayments?

The cash rate affects home loan interest rates because it is essentially the cost of borrowing money for commercial banks from the Reserve Bank and other institutional lenders. 

Whether you’re a homeowner currently paying off your mortgage or an interested buyer, it’s important to keep up-to-date with changes in the cash rate as these changes influence the rates offered by mortgage lenders. 

Changes to the cash rate are typically reflected in lenders’ interest rates. 

For example, in March 2020 when COVID-19 began to affect Australia’s economy and the cash rate dropped twice in a month, we saw lenders reduce their interest rates to remain competitive.

As the cash rate has started to rise after a record low 0.10%, lenders have begun increasing their rates.

While lenders aren’t obligated to keep pace with the cash rate, this is often the case.

%%How much can you save by refinancing?%%

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## How are homeowners and home buyers affected by fluctuating rates? 

When interest rates drop, it may open opportunities for home buyers to take out a home loan and buy a property. 

If you’re a homeowner with a [variable rate home loan](https://www.lendi.com.au/guides/variable-rate-home-loan/), you’ll benefit from lower repayment amounts.

However, when rates rise, home buyers may find it more difficult to buy if housing prices are still rising, as the increase in interest rates will affect their [borrowing power](https://www.lendi.com.au/inspire/finance/how-can-i-boost-my-borrowing-power/). 

For homeowners on a variable interest rate, this means an increase in home loan repayments. 

If you’re on a [fixed rate home loan](https://www.lendi.com.au/home-loans/fixed-rate/), your home loan repayments will remain the same until the end of your fixed term. 

Afterwards, your interest rate will usually [revert](https://www.lendi.com.au/inspire/finance/what-is-a-home-loan-revert-rate/) to your lender’s standard variable interest rate. 

Depending on whether the cash rate and your lender’s rates have increased or decreased since you first fixed your rate, your repayments will change accordingly. 

Calculate how much more you’ll owe if your interest rate rises using our repayments calculator. 

%%Calculate your monthly home loan repayments%%

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## What impact will rate rises have on how much people can borrow?

When interest rates rise, the [amount that borrowers are able to borrow](https://www.lendi.com.au/home-loans/calculators/borrowing-power-calculator/) from lenders decreases. 

This is because the higher the interest rate, the lower your borrowing capacity becomes, making it harder for prospective buyers to secure a home loan.

The silver lining is that rate increases [slow down property prices](https://www.lendi.com.au/inspire/property/how-low-could-house-prices-fall/) to match dwindling demand. 

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## What can you do to make sure you’re still getting a competitive rate?

It may be worthwhile reviewing your rate with a Home Loan Specialist to ensure you’re still getting a fair deal on your home loan. 

If you haven’t reviewed your home loan in a while, there’s a chance you could be paying [loyalty tax](https://www.lendi.com.au/inspire/insights/aussies-being-charged-banks-loyalty-tax-central-bank-confirms/). 

Loyalty tax occurs when a lender increases their interest rate for existing customers and refrains from passing on rate cuts that are offered to new customers. 

[Book an appointment with an expert](https://www.lendi.com.au/book-appointment/) to ensure you still have a competitive rate on your home loan.

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## What could your home loan repayments look like?

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## Got a home loan question? Just ask!
We're here to help. Get free expert advice at a time that suits you. Choose a time to chat with a [Home Loan Specialist here](https://www.lendi.com.au/book-appointment/)

*The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.*

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