Variable Home Loan Rate Changes: What you need to know

To understand how often variable rates change, you need to understand why they change in the first place as this determines how often rates move up or down.

What is a home loan interest rate?

A home loan interest rate refers to the cost charged by a lender to borrow money. The interest (cost charged to the borrower) is the amount that a borrower must pay to the lender in addition to the principal amount borrowed and is typically expressed as an annual percentage. The interest rate plays a crucial role in determining the overall cost to borrow money over the life of the loan, and the periodic repayments that must be made during the life of the loan. A lower interest rate means lower monthly payments and less cost and money paid over time, while a higher interest rate results in higher monthly payments and a higher total cost of the loan.

What causes variable home loan rates to change?

1. The Reserve Bank of Australia (RBA) changes the official cash rate

This is the biggest factor that influences how often variable rates move because any change the RBA makes to the official cash rate impacts lenders' wholesale funding costs, which are generally passed onto you either in full or partially.

The RBA is in charge of setting the official cash rate, historically on the first Tuesday of every month. In 2024 this will change to eight Reserve Bank Board Meetings. The cash rate is a key barometer of the country’s economic health and influences how high (or low) home loan interest rates are. The lower the official cash rate, the lower home loan interest rates generally are. 

However, just because the RBA decides to adjust the official cash rate, it doesn’t necessarily determine if your home loan interest will move as quickly, or even at all. This is at the discretion of each of the banks.

2. Other changes to the cost of funds

Banks source the money they lend in a number of ways, such as wholesale debt (e.g. borrowing from other banks), deposits (the money in bank deposit accounts), and residential mortgage backed securities (RMBS); as well as various funding sourced from the Reserve Bank, such as the Term Funding Facility and corporate bond purchases.

If the cost of borrowing money from any of these sources goes up, banks then have to increase their interest rates so they can cover these costs.

3. Regulatory changes

After the Global Financial Crisis which originated in the US and impacted global financial markets (including Australia), the Australian Prudential Regulation Authority (APRA) along with Australian Securities and Investments Commission (ASIC) implemented more rigorous lending standards and, risk and compliance measures in Banks to heighten protection across the Australian banking and financial market overall.

How often do variable rates change?

Variable interest rates can change frequently based on various factors including the country's economic conditions (such as inflation) and the decisions made by the Reserve Bank of Australia (RBA). The RBA reviews this rate, but it doesn't necessarily change. When the cash rate changes, banks usually respond by adjusting their variable interest rates in the same direction as the cash rate decision for loans and mortgages.

How much can a variable interest rate change?

Variable interest rates can fluctuate based on changes in the Reserve Bank of Australia's (RBA) official cash rate, or determined by the banks. While there is no specific limit set on how much these rates can change, historically, rate changes have typically been in increments of 0.25% or 0.50%. However, the exact change can vary, and it's determined by economic factors and the RBA's assessment of the country's financial health.

When do variable interest rates change?

Variable interest rates can change at any time, but they often move in response to decisions made by the Reserve Bank of Australia (RBA), who meet regularly throughout the year. The RBA reviews the official cash rate, which serves as the benchmark interest rate, on a monthly basis. However, it's important to note that the cash rate doesn't necessarily change every month and can change based on a bank’s decision.

What do variable interest rate changes mean for home loan repayments?

If you have a variable rate loan, your interest rate will increase and decrease throughout the life of your loan. If the rate increases, the interest cost each month also increases. This means your repayments need to increase so that you can pay your loan off over the remaining loan term. Conversely, if the rate decreases, the interest cost each month also decreases. This means your repayments will decrease. Alternatively, you can choose to continue to make the same repayments which means you will have the benefit of paying your home loan faster."

^* You have to be a Qantas Frequent Flyer member to apply for the Qantas Home Loan. This information has been prepared without considering your objectives, financial situation or needs. You should consider your circumstances before acting on this information.