Why the official cash rate should matter to home buyers

By Matt White

Are you thinking about buying real estate in St Kilda and need a home loan to make it possible? If so, there's a strong chance you will have been keeping an eye on the official cash rate (OCR), which has experienced its fair share of ups and downs over recent months.

You might be asking yourself why this is such an important factor when buying a home. The truth is that it has a bearing on lots of different areas of the economy, many of which will have an impact on you if you're hoping to apply for a mortgage.

What is the official cash rate?

The OCR is quite simply the rate at which banks borrow and lend money to each other. The Reserve Bank of Australia (RBA) is responsible for setting the OCR each month. At the moment, it stands at 1.75 per cent – that's the lowest rate in history.

How will it affect my mortgage?

When you approach a lender in search of a home loan, the OCR will influence the interest you're expected to pay on that loan. If banks are borrowing and lending money to each other at a reduced rate, the theory is that this will be reflected in the amount of interest you're charged on your mortgage.

This does, however, rely on banks and other lenders to pass on the rate cut. When the RBA decided to lower the OCR in May 2015, this didn't happen across the board, meaning borrowers weren't feeling the full benefit.

Nevertheless, fast forward to May 2016 and it's quite a different story. Many lenders, including Commonwealth Bank, opted to pass on the rate cut on their standard variable rate products. The bank revealed that this would save homeowners in the region of $55 a month on an average mortgage of $350,000.

Why do I need to be aware of further changes to the OCR?

Whether you've already secured a mortgage to buy a property in St Kilda or not, you should always bear the cash rate in mind. This is especially true if you're on a variable rate product – any fluctuations in the OCR could be reflected in the amount of interest you pay.

There's already speculation that the OCR may be cut further. The Housing Industry Association believes that conditions in the Australian economy still aren't quite where they should be, which could encourage the RBA to take action through the cash rate.

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