What are interest rates, and how does it affect housing?

What are interest rates, and how does it affect housing?
Could Australia be heading for a housing "bust"?

This week, the Reserve Bank of Australia (RBA) kept interest rates as they were. What does that mean and how does that affect you? We’re deep diving below. 

What is the RBA?

It’s not a bank like the Commonwealth Bank or NAB. It’s an institution that is responsible for the stability of our currency (AUD) and a thriving economy. The way they do this is through monetary policy, like adjusting the cash rate (remember this term). 

What is the interest rate?

A percentage of a loaned amount of money that a lender will charge the borrower. Interest rates are required every time money is lent from one person to another, whether that’s the RBA to banks or banks to consumers. 

Say your interest rate is 3.5%. That means if you were to borrow $100 at this interest rate, you would have to pay the bank back the original $100 plus 3.5% of $100 ($3.50) – so a total of $103.50. The extra $3.50 is called your ‘interest’ payment.

What is the cash rate? 

This is the rate (plus 0.25%) that banks can borrow from the RBA. It’s this rate that is decided on the first Tuesday of every month by the RBA. The RBA either lowers, raises, or keeps the same cash rate. If the cash rate goes down, banks will borrow more from the RBA. If the cash rate goes up, banks will borrow less from the RBA. Cash rates are like a control stick for the economy. 

The current cash rate is 0.10%. 

How does that affect people like you and me? 

Whatever happens to the cash rate directly affects the interest rates on loans that people like you and me would get. If consumer banks have borrowed more from the RBA because of a low cash rate, they are able to give consumer loans at a lower interest rate to encourage people and businesses to buy more. But if the cash rate has been raised by the RBA, then the banks will borrow less, meaning they will have to increase the interest rate on the consumer loans, making loans more unattractive. 

The RBA announced on Tuesday that Australia’s cash rate will remain at the historic low of 0.1%, despite the ongoing criticism of rising house prices. With the cash rate (leading to low interest rates on loans) and people becoming more inclined to borrow money, the price of houses rises. However, RBA Governor Philip Lowe noted inflation was not yet high enough to justify a rise in interest rates. 

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