Interest – the amount you pay to the bank or lender to borrow money from them. It is often expressed as a % (interest rate) which is applied & charged to the outstanding loan amount. It is the cost of borrowing money. This changes from time to time and is set by the bank / lender. Interest rates are often spoken about on the news and are one of the costs banks/lenders charge you to borrow money from them.
The rate the press & banks talk about is the variable interest rate on home loans. Interest rates are what the banks charge you (in % of the amount you borrow) to lend you some money.
Depending on the product you have, often the rise differs. If you have a fixed home loan –
this will not affect you.
Think of a bank like a shop (I’ll try stay away from a banana smoothie example..). When the cost rises for the business (say for example the cost of wages, rent or the actual cost of making the goods), often the shop may increase the price people would pay for that product.
So, that’s what banks do with home loans. When their costs rises, they may pass some of the costs onto the consumer in the form of rate rises.
Why is this happening? When banks lend out money, they have to get that money from somewhere.
Historically that has mainly come from deposits or savings accounts (so when you give the bank money in your savings account, they can use it for other people’s home loans). Although deposits still play an important role, the money for home loans also comes from overseas markets. When the cost of this money rises (e.g. overseas markets), this is the same as a business getting charged more for creating their goods they sell to customers.
That all being said, banks have definitely not increased their interest rates on home loans in proportion to their cost of funds with their profit margin decreasing over the last decade or so.
The Reserve Bank of Australia (Australia’s banks’ banks or central bank) sets the overnight cash rate – which is what the RBA charges banks to borrow money overnight and it’s what Australia uses (mainly) to try get a handle on inflation.
This is at a historical low of 1.5% (April 2019).
Historically, banks only moved up or down with cash rate movements – but because some of the money to fund home loans comes from overseas, this may not make perfect sense.
Westpac’s most recent rise of 0.14 percentage points from September 19 2018 will add around $35 per month to a $300,000 variable home loan.