11 Jul 2021

How Is Variable Interest Calculated?

Variable interest rates change because they’re impacted by the economy and market. Government actions taken by the Reserve Bank of Australia determine rates too. The variable interest rate calculation takes into consideration several factors, such as the RBA’s cash rate, bank transactions among each other, and supply and demand. 

The Australian economy has seen severe fluctuations in the past because it got overheated. In 2009 when mortgage interest rates skyrocketed, the economy ran away with itself. Since then, the government takes a more active influence over lending transactions. 

Interest rates change daily. If a lender decides to change their rates, it impacts the lender’s customers on the following billing cycle. You can see how shifts in interest rates impact a mortgage with our online mortgage calculator.

The RBA’s target cash rate influences interest rates. The cash rate is a result of the volume-weighted average interest rate on cash market transactions at settlement. Lenders use this information to determine their rates. It’s considered the prime rate. Plus lenders add a margin to cover their costs. 

If there’s a low demand for credit and debt, lenders have the freedom to lower rates. Well-qualified candidates can count on lenders’ competition for their business in all market conditions. 

For the variable loan holder, ideally, rates will drop in their favour. The action drops repayment amounts too. 

Variable Interest Calculation Conclusion

Most prospective homebuyers know that interest rates go up and down daily. Significant interest rate fluctuations, if any, take place once a month after the RBA meets. Lenders calculate their variable interest rate based on the benchmark provided by the RBA. For more information, our Mortgage House loan specialists can help.

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