28 Apr 2017

What Determines Interest Rates?

Interest Rates

Home loan interest rates are always in a state of flux. Sometimes they rise, sometimes they fall, and sometimes they change suddenly and seemingly without warning.

There are many factors that can affect interest rates, and in turn, the size of your repayments. These factors include, but aren’t limited to:The loan to value ratio (or LVR)

  • The loan to value ratio (or LVR)Whether the property is owner-occupied or an investment property
  • Whether the property is owner-occupied or an investment propertyWhether or not the property is covered under protection and indemnity insurance
  • Whether or not the property is covered under protection and indemnity insuranceThe financial status of the borrower
  • The financial status of the borrowerAustralia’s official cash rate
  • Australia’s official cash rate

The official cash rate is determined by the Reserve Bank of Australia (RBA). Once a month, the RBA review Australia’s official cash rate and determine whether it needs to be adjusted. The cash rate has a direct impact on interest rates across the nation, and many Australians paying off home loans keep a close eye on it to inform their financial planning.

What affects the cash rate?

The RBA doesn’t simply pick a figure and go with it. They base their decisions on a range of factors, including but not limited to:

Domestic employment figures

The higher unemployment is, the more likely rates are to decrease. This is because lower rates can lead to more employment and business spending.


The higher the inflation figures, the more likely rates are to increase. This is to discourage consumer spending. The RBA aims to keep Australia’s inflation figures around 2-3%.


The national household debt is considered when determining the official cash rate as well. Typically, housing prices are boosted when interest rates are lowered. The ABR uses the official cash rate to control the housing market and keep everything in check on a national scale.


Our dollar is stronger when our cash rate is high compared to other countries. The state of our currency is a major consideration when determining the official cash rate.

Why do lenders offer different rates?

The official cash rate isn’t the only thing that affects what lenders charge. There are also a range of personal considerations to be made, and not all lenders approach them the same way.

Figures such as your credit score, debt to income ratio and deposit size can affect the interest rate and repayment size of a home loan.

Lenders decide what rates a homeowner qualifies for primarily by assessing risk. The less “risky” you are as a prospective borrower, the more flexible your lender will typically be. Your best option is to speak to a lender and find out what the best options are for you – there are many ways to enter the property market at an affordable price.

Mortgage House

At Mortgage House, we offer some of the lowest rates a homeowner can expect on their home loan. Regardless of what’s happening in the Australian economy, or with our official cash rate, we consistently offer competitive rates that you’ll have a difficult time finding elsewhere.

If you’re thinking of buying a home, you can contact us for advice about the best options for you when it comes to your mortgage. The cost of your mortgage can drastically affect your financial planning, so it pays to speak to the experts about it.

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