If you're looking to take out a loan for a home, investment or other stuff, you've probably heard of the cash rate – officially called the official cash rate, or OCR. It's a rather ambiguous term, and one that doesn't quite give much away into what it is, what it's for, and what it means for you.
The cash rate is designed to indirectly affect the interest rate that will be placed on your loan; but as we'll see, that's not always the case.
That's probably the reason why there are so many myths and misconceptions around the cash rate. Let us play mythbuster for a few minutes, and dispel some of the misnomers around the OCR.
What is the cash rate?
Your commercial bank has to get money from somewhere. The Reserve Bank of Australia (RBA) places an interest rate on overnight loans to the banks, and we call this the cash rate.
The RBA meets once a month to decide whether to increase or drop the rate, depending on how they see the Australian economy. Keeping it low is intended to increase consumer and business spending, putting more money back into the government coffers.
With the Aussie economy sat on a plateau, the OCR has been at a record low for months, first at 2.25 per cent at the start of the year, and at 2 per cent since May 2015. It will now stay this way over the Christmas period until the RBA meet again in February.
4 myths ready for busting
As we mentioned, there's some confusion around the cash rate, and a number of misconceptions. Let's clear some up.
Myth 1) The cash rate is the interest rate
Nope – the cash rate is designed to indirectly affect the interest rate that will be placed on your loan; but as we'll see, that's not always the case.
Myth 2) The big banks play ball
Just because the central bank is charging less in interest doesn't mean your high-street bank has to pass this on. We saw this in November, when Westpac led the charge by increasing its interest rates by 20 basis points, despite the cash rate being at its lowest ever point. The lesson? Make sure any cash rate fall works for you, whether you're looking at a home loan or any other type of bank borrowing.
Myth 3) It only influences variable rates
The Australian media can be fixated on standard, variable home loan rates, to the point when they don't talk about anything else. If the cash rate does influence your bank's interest rates, it will impact the amount you repay regardless. Even if you take out a fixed-rate loan, the interest rate will determine how much you repay each month – don't let anyone tell you otherwise.
Myth 4) It's too confusing
It can be tempting to leave your bank in charge of your finances and hope they'll do what's best for you. Some won't. Banking isn't that difficult, and shouldn't be. If you need some easy-to-digest clarity on your loan terms, check out our online calculators – a little understanding can go a long way towards securing your financial future.