Getting your first home loan involves learning a few new things. So what’s the difference between ‘cash’ and ‘retail’ rates, and how do they affect your loan?

What is the ‘retail rate’?

The retail rate is the amount of interest you will pay on your home loan. This rate is set by the lender and can be either fixed for a period of time or variable, which means it will fluctuate.

What is the ‘cash rate’?

Simply put, the cash rate is a kind of benchmark interest rate. The Reserve Bank of Australia sets the cash rate, which officially means the rate of interest charged on unsecured overnight loans between banks. This rate changes in response to broad economic factors like wage growth and inflation.

How does the cash rate affect your home loan?

It’s generally established that lenders set their interest rates to mirror the cash rate. When this benchmark moves up or down it affects lending rates generally – you can assume that if the cash rate increases or decreases, your home loan will too.

Does it matter what type of loan you have?

Changes to the cash rate usually affect variable loans. This is because variable rates are designed to shift with the market.
As the name suggests, fixed rate loans aren’t affected by fluctuations in the cash rate for the fixed period. Once that ends, some customers may find their interest rates jumping up or down to reflect the current cash rate.

A third option is getting a ‘split rate loan’, which basically means that your rates will be partly fixed and partly variable. Some customers prefer this as it gives the best of both worlds. With variable rate loans there is also the advantage of having an offset account attached to it which can save you interest on your repayments.

Keep in mind that variable rates can be impacted due to offset accounts

Key points to consider

• The cash rate is not the same as the retail rate
• Retail rate changes mirror fluctuations in the cash rate
• Variable home loans will be affected.
• Fixed term loans can protect you from rate changes
• Split rate loans offer a bit of each: protection from changes as well as the opportunity to pay less interest if the cash rate falls

Hopefully this helps you to have a clearer understanding of some key terminology you’re likely to come across on your home-buying journey.
Your mortgage broker can provide further advice including up-to-date details around how the market fluctuates and what this means for your loan.