09 Apr 2021

What Affects Interest Rates?

What Affects Interest Rates?


Interest rates are among the most important factors affecting loan decisions. Unfortunately for many Australians, interest rates are also the most difficult factor to understand. 


But with this short guide, borrowers will have better interest rates and will be able to plan for their lending future. 


What Are Interest Rates?


Interest rates are the amount of interest charged by a lender. Although they don’t directly affect the amount of money a person can borrow, they do determine monthly amounts. A $100,000 loan at a 2.29% 3-year Fixed Rate will require a monthly payment of $384.29, while a $100,000 loan at a 2.74% 5-year-Fixed Rate requires a monthly payment of $407.71.


Who Determines Interest Rates? 


The Reserve Bank of Australia (RBA) sets the domestic official interest rates. Because it works to secure the “stability” and the “economic prosperity and welfare of the people of Australia,” the RBA will raise and lower interest rates as it sees fit. 


When the RBA needs to increase spending and encourage borrowing, it will lower official interest rates. However, lowering rates increases inflation, which can also have adverse effects on Australia’s economy. To slow inflation, the RBA will raise official interest rates, thereby discouraging spending and borrowing. 


Why Am I Paying More than the Official Interest Rates? 


While the RBA sets the official interest rates, other factors do affect the rate assigned to a given loan. The borrower’s credit history can raise or lower the rate they receive. Because a borrower with a high credit score has shown that they will repay their debts, they will receive a lower interest rate. Lenders will charge a higher interest rate to those with lower credit scores to offset the risk of the loan. 


What Can I do About Interest Rates? 


No one individual has the power to raise or lower the official interest rate, but borrowers can get the best possible loan for themselves by making sure that they have a steady income and have paid down debts before applying for a loan. A higher down payment and a shorter term can also secure a lower interest rate for borrowers. 


In addition to following official interest rate trends, borrowers can also use Mortgage House’s loan calculators to determine their monthly payments. And our lending specialists are always ready to answer any questions. 


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