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Interest rates explained

How home loan interest rates are set in Australia

Between a Reserve Bank announcement and the rate shown on a loan statement sits a sequence of funding costs, risk margins and repricing decisions. Understanding that sequence helps borrowers judge when a rate review is warranted and when a rate announcement has little bearing on their loan.

Four factors that determine home loan interest rates

01

The RBA cash rate

The Reserve Bank of Australia sets the overnight cash rate at its meetings throughout the year. The cash rate is the anchor for variable rates. When it moves, lenders typically follow within weeks, although not always in full.

02

Lender funding costs

Banks fund loans from deposits and wholesale markets. When global funding becomes more expensive, lenders may change rates out of cycle, that is, without any RBA decision.

03

Competition and new-customer pricing

Lenders price competitively for new customers (the 'front book'), while rates for existing customers (the 'back book') may be adjusted over time. The difference between the two is commonly referred to as the loyalty tax.

04

Borrower risk profile

Loan-to-value ratio (LVR), income stability, property type and loan purpose all affect the rate offered to an individual borrower. The advertised rate applies to the borrower profile a lender most prefers, which may differ from an applicant's own circumstances.

Pricing by loan type

Home loan pricing tiers, from lowest to highest rate

The indicative structure below holds through every rate cycle, whatever the cash rate happens to be in a given month. Live rate tracking is planned for this page. In the meantime, a free home loan assessment provides current rates for a borrower’s individual circumstances, and the guide to Australian home loan lenders describes the lender tiers referred to here.

Owner-occupier, P&I, big four advertised

The headline rate published on the major banks' websites. It is generally the starting point for pricing rather than the final rate.

Owner-occupier, P&I, negotiated / broker

Typically 0.2 to 0.7% under the advertised rate for strong borrowers at ≤80% LVR.

Investor, P&I

Usually ~0.2 to 0.4% above equivalent owner-occupier rates.

Investor, interest-only

A further ~0.1 to 0.4% above investor P&I rates. This is generally the most expensive category of mainstream lending.

Fixed rates (1 to 5 yrs)

Priced according to market expectations of future rates rather than the current cash rate. Fixed rates therefore tend to move before variable rates.

Open the mortgage repayment calculatorOpen the fixed vs variable calculator
Cost of a rate difference

The long-term cost of a 0.25% rate difference

On a $600,000 loan over 30 years, a quarter-percent rate difference is roughly $95 a month, or about $34,000 over the life of the loan. Half a percent is nearly $70,000. For this reason, a repricing request to the existing lender and a review by a mortgage broker are generally among the most valuable steps a borrower can take in a year. Where the existing lender will not match the market, the home loan refinancing guide sets out the process and costs of switching, and the fixed and variable rate comparison outlines the trade-offs between the two rate types.

In-depth guides to home loan interest rates

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Home loan interest rates: frequently asked questions

What is the RBA cash rate?

The RBA cash rate is the interest rate on overnight loans between banks, set by the Reserve Bank of Australia. It anchors the broader rate structure: variable mortgage rates typically sit a few percentage points above it, and it is the RBA's main instrument for managing inflation.

When the RBA cuts the cash rate, do home loan repayments fall automatically?

Repayments fall only if the lender passes the cut on to the variable rate. Lenders usually do so, but not always in full or immediately. Fixed-rate loans do not change until the fixed term ends. Even then, the repayment may remain the same unless the borrower asks the lender to recalculate it.

Why is an existing home loan rate higher than the advertised rate?

Advertised rates are aimed at new customers with low LVRs. A borrower who has held a loan for a few years is likely to have moved onto back-book pricing. The available remedies are a repricing request to the current lender or a refinance. Both begin with identifying the size of the difference.

Is it better to fix a home loan rate now or to wait?

Fixed rates already incorporate the market's forecast of future rate cuts and increases, so waiting for an announcement is unlikely to produce a better outcome. It is generally more appropriate to fix because repayment certainty is valued, rather than in an attempt to anticipate the bond market.

What is a comparison rate?

A comparison rate is the interest rate with most fees included, calculated on a standardised $150,000, 25-year loan so that products can be compared on a consistent basis. It is a useful indicator but an imperfect measure: most loans are larger than the standard example, which reduces the effect of fees.

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