What Happens if the Cash Rate Increases?
The cash rate is the interest banks charge each other when they lend each other money to keep up with their daily cash needs. Banks want to make a profit. They charge their borrowers interest on loans to pay their own loan backs and still make money. Therefore, if the cash rate increases, your interest rate will most likely increase.
How Does the Cash Rate Affect My Interest Rates?
Banks also need to borrow money to keep themselves up and running. They may borrow from various places, including other banks, wholesale debt, and deposits from a customer. As a business, they want to make a profit, meaning they want to bring more money in than they repay. If the cost of borrowing from another source is more expensive, the amount they have to repay their lender increases. To make a profit, they may raise the interest rates on their home loan products. Higher home loan interest rates mean more money coming in every month, creating a profit.
What Does a Higher Cash Rate Mean for the Housing Market?
When the cash rate is high, generally, home loan interest rates are high, even for new borrowers. Higher interest rates cause fewer people to want to purchase a home, which can cause there to be more homes for sale than people buying. As fewer people buy houses, the price of homes drops, which can slow the economy. Eventually, the RBA will drop the cash rate to lower interest rates to entice people to borrow money to purchase homes. After enough time passes, the cash rate increases again, creating a cycle. Usually, this cycle occurs over a few years.
Right now, the cash rate in Australia is at a historic low. Mortgage House can find you a home loan with the lowest interest rates.