25 Feb 2021
The Truth About An Interest Rate Drop & How It Affects Your Home Loan
There are a number of misconceptions about interest rate drops, including who they impact and how exactly individuals may be affected.
Let’s start with the basics.
What Exactly Happens When the Interest Rate Drops?
The Reserve Bank of Australia announced an interest rate drop to 0.10% in November of 2020. That rate is the interest rate that commercial banks pay to a central bank when borrowing money.
That relationship then goes on to affect individual customers of those commercial banks in different ways.
But a cut in the base interest rate (described above) doesn’t necessarily mean your commercial bank must drop their own rates.
Why does the interest rate change? It’s the job of any central bank to adjust rates based on current economic conditions.
Does an Interest Rate Drop Affect You?
That depends on the type of home loan you have: fixed-rate or variable-rate.
If you have a fixed-rate home loan, the drop in interest rates won’t impact you because you’re locked into a certain rate for a certain period of time.
If you have a variable-rate home loan, the interest rate cut will affect your rates by however much your commercial bank passes on to you.
Depending on what portion your lender holds back, choosing to refinance your home loan could prove financially beneficial.
If you’d like to find a home loan that could save you thousands with better rates and fees, start here.
The Pros & Cons of Interest Rate Cuts
| Pros | Cons |
| Dropping interest rates give homeowners a chance to save thousands on repayment by switching to a different lender. | The fixed interest rate on your home loan won’t change. You’ll have to wait for the fixed rate period to end. |
| Lower interest rates generally mean an increase in borrower capacity. | Savings interest rates go down, meaning you’ll earn less interest on the cash in your bank account. |
| When variable interest mortgage rates go down, the lower rate on your mortgage means you’ll have smaller payments or be able to pay off the loan quicker. | Especially for fixed-rate loans, a dropping interest rate often means having to pay higher closing costs. |
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