16/10/2026
What you need to know about the most important part of your home loan:
Are you an expert on all lending related topics? That's okay - most people aren't. If you're still trying to understand the truth about interest rates, you're not alone. Here are a few answers to the questions you were too embarrassed to ask.
How are interest rates determined?
The Reserve Bank of Australia (RBA) sets the official interest rate or 'cash rate' which takes into account a whole list of factors about how the economy is performing at that point in time.
The RBA meets once a month to review the inflation rate, unemployment figures, CPI, PPI and retail sales, and from that information they decide whether to increase, decrease or leave on hold the official cash rate.
The cash rate is the interest rate that the banks and lenders will pay to the reserve bank. If this increases, your lender will usually pass the cost onto you - the borrower. If the cash rate decreases - the reserve bank intends that the savings should also be passed on by your lender - but this isn't always the case.
By moving the interest rates up and down, the RBA tries to keep the Australian economy in check, by either slowing things down to keep the cost of living under control, or speeding up spending to help boost growth in certain areas.
What are the different types of interest rates?
The two main types of interest rates are Variable and Fixed.
Variable rates are usually a bit lower, and you pay the best going rate at the time. If the cash rate increases, your lender will increase your variable interest rate. But if the cash rate decreases, your repayments will usually go down.
Fixed interest rates are locked in for a period of time -usually just a couple of years - so that you know exactly how much you will need to budget for. This can be helpful for borrowers on a strict budget who can't afford a lot of interest rate rises in the short term. However you will usually pay a higher interest rate overall if you choose this option.
Which interest rate is best for me?
The decision of whether to choose a variable or fixed interest rate should be made after carefully considering your own personal needs and commitments.
A mortgage broker should be able to help you weigh up the pros and cons to work out the best option.
