Mortgage Interest Rates

Unley Conveyancing is a member of the Australasian Conveyancing Group.

Interest rates are a major talking point for Australians and rightly so ... after all a mortgage is often the biggest financial responsibility facing families.

Who's at the wheel?

In terms of actually setting the cash rate (the base interest rate) the Reserve Bank of Australia (RBA) is in the driving seat.

The RBA looks to keeping consumer price inflation broadly in line with the inflation targets of Australia's peer economies.

If the Australian economy is a car the RBA is driving and interest rates are the pedal. Too slow and the RBA may lower rates to encourage growth, too quick and a rate hike might be used to douse the economy's enthusiasm.

How does the RBA decide?

The RBA's board meets 11 times a year to discuss interest rates. The board comprises academics, economists and senior businesspeople.

Detailed reports on the Australian and international economy are prepared for the board including information on retail sales, consumer confidence, the prices paid by producers and more.

Globally, rates tend to move in cycles and often take their lead from the US, the world's biggest economy.

Why is my loan interest higher than the cash rate?

The RBA cash rate is based on the rates paid by banks in the wholesale market. So while credit is available to banks at a rate of say, 5 percent in the wholesale market; they will add a premium before applying the rate to retail loans and mortgages. The concept is the same as a supermarket buying produce in bulk at a lower rate than offered to shoppers.

Australians are not net savers – as a nation, our debts are bigger than our savings - so the banks have to source wholesale funding for lending from overseas banks.

How can I tell if rates will rise or fall in the future?

Unless you've got a fully functioning crystal ball, it's hard to know absolutely which direction rates are headed.

However, the interest rate futures market can give some hints. Investors buy interest rate futures to protect themselves against rate movements in the future. As a result, if 90 day interest rate futures (usually described as dealers bill rates) is at five percent and today's cash rate is 4 percent, the futures market thinks rates will be around 5 percent in three months.

Economists also make interest rate forecasts and these are often reported in the media. There can be a wide divergence of views among analysts about what direction rates will take and many were caught off guard by the rapidity of the Global Financial Crisis and the sudden change in rates direction.

So who is in control of rates?

No one person or organisation is in sole charge of the direction of interest rates. Indeed, while the RBA sets the cash rate, the factors that influence it are spread far and wide. Retail banks (and market competition between them) have the final say in determining the rate you pay on your mortgage or personal loan.