How relevant is the Cash Rate, anyway?

Does the cash rate affect mortgage rates as much as we think?

On Tuesday (05 March) the Reserve Bank of Australia (RBA) held its monthly monetary policy meeting. The RBA elected to hold the official cash rate at a record low of 1.5% for the 36th consecutive month. The last cash rate change was in RBA’s August 2016 monetary policy meeting; a cut of 25 Base Points (BP).

However, mortgage industry experts have found the cash rate freeze has not swayed banks from lifting their mortgage rates in recent months.

So, is the cash rate really holding as much relevance as we think?

Throughout 2018 and into 2019, many lenders including the Big 4 Banks, non-banks and credit unions alike have announced out-of-cycle rate increases across home loan products.

These lending institutions have cited a sharp and ongoing rise of overseas funding costs as the primary pressure driving rate increases. This funding cost is referred to as the Bank Bill Swap Rate (BBSW).

Mortgage Choice CEO Susan Mitchell observes “it is no longer reasonable (for borrowers) to assume that changes in the cash rate, or lack thereof, will drive home loan interest rates”


What should borrowers do?

Those seeking a home loan should prepare for unforeseen changes, and not pin mortgage rate expectations on RBA  movements alone.

This tip comes despite the RBA’s most recent hint that the next cash rate movement could be a cut.

Borrowers should continue seeking the best deal among lenders, but should remain aware that the current lending market is volatile – and also dependent on external factors, such as the BBSW.

According to Rate City, Reduce Home Loans’ mortgage rates are among the most competitive in the market. It makes sense to shop around to get the best deal in preparation for unexpected changes in the lending landscape.

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