How do interest rates affect your loan application?
Every month (except January), the Reserve Bank of Australia (RBA) makes a decision on the official cash rate (OCR). They can lower it, keep it the same, or raise it, and that decision has a flow-on effect to everyday Australians and businesses all over the country.
Essentially, the cash rate is what it costs for banks and lenders to borrow money on an overnight basis. Generally, changes in this rate gets passed on to consumers in some capacity, so when it’s high, it costs more to take out a loan, and when it’s low, it costs less to borrow. However, there is not a direct relationship as banks and lenders raise funding from a range of sources (some of which have no connection with the OCR) and lend to consumers for longer terms (not overnight).
Currently, the OCR sits at 1.5 per cent*. It has been slowly dropping since October 2011, when it was 4.75 per cent, with its latest decrease back in August 2016 of 25 basis points (0.25 per cent).
How interest rates affect your loan application
Whenever the OCR changes, it’s up to lenders to decide whether they want to follow suit and offer their customers a new rate as well. In many cases, lenders will offer new rates to reflect the change. This means that if the RBA lowers the OCR, then your lender may offer better deals on loans, and more people may go out and purchase new cars, homes, and other big-ticket items, which helps the economy.
This way, a decision by the RBA can help you with your loan application. Should they drop the rate – or simply keep it the same at current low levels – it can make it more affordable for you to buy a home with lower mortgage interest rates. The trick is to know the different types of mortgages and how each one makes the most of the OCR.
How you can use interest rates to your advantage
Variable interest rates are one of the options for your mortgage. This is where the rate can and will rise and fall alongside the OCR. This means that should the rate drop, your interest rate will, too. It can be a good way to make the most of lower rates, but it may not be the best option for those who want to know exactly how much they have to pay for the duration of their loan.
Fixed interest rates, on the other hand, are set in stone. When you sign up for a mortgage, a fixed interest rate will mean you know exactly what you’ll pay and when throughout your loan period. It means no surprises, and no worrying about increased interest should the OCR start rising again.
For those who like the best of both worlds, a split interest rate offers a little of each. Part of your mortgage can be fixed on one interest rate, while the other is variable.
Finding the best option for you will take time, research, and expert advice from a financial advisor or lender. Contact our lending professionals today to see how Beyond Bank can help you.
*Source – Official Cash Rate as published by on the RBA website.