What’s driving interest rates?

Once upon a time, once-a-month, we waited on the Reserve Bank to announce its cash rate and that determined mortgage rates.  But now there’s a new mechanism of determining interest rates and it impacts how much we pay on our home loans.

The RBA has already cut the cash rate to 0.25 per cent (with more to come) at the same time, it is pumping funds to the banks in several new ways – all of which are influencing what we pay.

Next month, the RBA will do three things to keep interest rates low.  It will chisel its cash rate down to 0.1 per cent, lower its three-year government bond yield target and drop the cost of borrowing that banks are accessing under its $200 billion Term Funding Facility, to the same 0.1 per cent level.

The Reserve Bank has provided cheap short-term funds in the repo market (where institutions pledge assets in exchange for short term funds), and longer term, three-year funds, via the Term Funding Facility.

All of this means that the banks are paying close to .1 per cent for the money they lend to borrowers. 

Home loans are at record lows, but with the rates they are paying dropping further, so they can win market share, the banks are going to drop fixed and variable rates even more over the next few months.

With the cash rate at .1 per cent, 3-year bond yields at .1 per cent and the Term Funding Facility at .1 per cent there’s now more than one game in town.

Not only will we see rates lower, we will see rates lower for longer and driven by other RBA activities, it’s likely that borrowers can have more confidence with fixed rates than ever before.

If you want to chat about getting a better interest rate on your home loan, please contact your Origin broker.

Graeme Salt is a Leader of The Futurus Group, whose brands primarily comprise Origin Finance, Chan & Naylor Finance as well as Walker & Miller Training.

For a no obligations consultation on your home loan needs, please contact him on 02 9922 5055