Unlocking Interest Rates & Why They Move
Interest rates are one of the first things most first home buyers focus on and for good reason. Your interest rate directly affects your repayments, your cash flow, and how comfortable your mortgage feels day to day.
But here’s the key thing to understand upfront:
Your interest rate will change over time. It’s not something you lock in forever. Rate movement is a normal part of having a home loan.
That’s why chasing the best rate alone isn’t enough. Yes, your rate matters. But over the long term, your strategy, loan structure, buffers, and how you manage the loan will have a much bigger impact than trying to beat the market by a fraction of a percent.
In this resource, we’ll break down:
What an interest rate actually is
The difference between variable, fixed, and split loans
Who really sets your interest rate and why it moves
How rate changes flow through to your repayments
How to plan for future rate rises with confidence
Why strategy matters more than the interest rate itself
This resource supports Episode 25 of the First Home Unlocked Podcast: Unlocking Interest Rates and Why They Move.
What an Interest Rate Actually Is
An interest rate is the cost of borrowing money. When you take out a home loan, you’re repaying:
The amount you borrowed (the principal), plus
An additional percentage charged by the bank, which is your interest
So if your interest rate is 5.45%, you’re being charged 5.45% per year on whatever amount you still owe the bank. Even though interest rates are advertised as an annual percentage, interest is calculated daily.
Every single day, the bank looks at your remaining loan balance and charges interest on that amount. That’s why:
Reducing your balance sooner lowers the total interest you pay
Even small changes to your balance can make a meaningful difference over time
Higher interest rates mean higher repayments because you’re paying more to borrow the same amount of money. Lower rates reduce that cost.
Interest exists because lending money is risky. It’s how banks get paid for providing funds upfront and taking on that risk.
A helpful way to think about it:
On a mortgage, you pay the bank to use their money
On a savings account, the bank pays you because they use your money to lend to others
Your mortgage interest rate is simply the price of borrowing money.
Variable vs Fixed vs Split Loans
Variable Rate Loans
A variable rate moves up and down over time. This is the most common choice for first home buyers because it offers flexibility.
Advantages of a variable rate:
Unlimited extra repayments in most cases
Access to offset and redraw features
You benefit if rates fall
Easier to refinance later because there are no break costs
Disadvantages of a variable rate:
Repayments increase when rates rise
Harder to predict long-term repayments
Requires buffers and comfort with some uncertainty
Fixed Rate Loans
A fixed rate locks in your interest rate for a set period, usually between one and five years.
Advantages of a fixed rate:
Repayments stay the same during the fixed period
Protection from rate rises
Greater certainty for budgeting
Disadvantages of a fixed rate:
Extra repayments are usually limited or capped
Break costs may apply if you refinance, sell, or repay early
Offset and redraw are often unavailable
You don’t benefit if rates fall during the fixed period
Split Loans
A split loan combines both options, with part of your loan fixed and part variable.
This can offer a balance between certainty and flexibility, depending on your goals and risk tolerance.
There’s no universal best option. The right choice depends on your situation, your buffers, and what you value more right now, stability or flexibility.
Who Actually Sets Your Interest Rate and Why It Changes
The Role of the RBA
The Reserve Bank of Australia (RBA) sets the cash rate, which is the interest rate banks pay when borrowing from each other overnight. The RBA adjusts the cash rate based on factors like:
Inflation and cost of living
Economic growth
Employment and wages
Consumer and business confidence
If inflation is too high, the RBA may raise rates to slow spending. If the economy is weak, they may cut rates to encourage borrowing and investment. Importantly, the RBA does not set your home loan rate directly. It sets the starting point.
How Banks Set Your Actual Rate
Each bank then sets its own interest rates based on:
The cash rate
Their cost of funding
Business costs and profit margins
Competition from other lenders
Risk factors like LVR, borrower profile, and loan features
That’s why some banks pass on the full RBA change, others pass on only part and bank rates can change even when the RBA doesn’t move
Your mortgage rate is shaped by a combination of:
RBA policy
Bank pricing decisions
Your individual loan structure
Rate Trends Over Time
The last few years have been unusual with interest rates.
During Covid, the cash rate dropped to 0.10%, the lowest level in Australian history. This was an emergency setting, not a normal environment.
As inflation surged post-Covid, rates rose quickly to cool the economy. In 2025, the cash rate sits around 3.6%, which is much closer to long-term historical averages.
Rates today often feel high because they’re compared to the temporary Covid lows, rather than normal conditions. Understanding this context helps remove some of the emotion from rate conversations.
Planning for Future Rate Changes
Rates will move. They always have. So the goal isn’t to predict the future. It’s to be prepared for it.
Start by checking whether repayments at today’s rate feel genuinely comfortable. That’s your baseline. If repayments already feel tight, even a small increase can add pressure.
Banks assess loans using a 3% buffer, meaning they test whether you could still afford repayments if rates were 3% higher. But that doesn’t mean it would feel comfortable for you. Ask yourself:
What does my life actually cost each month?
If rates increased, where could I adjust?
Do I have enough buffer to absorb changes?
When you combine realistic budgeting, buffers, and stress testing, rate changes become far less intimidating. They stop being surprises and start being something you’ve already planned for.
Strategy Matters More Than the Interest Rate
Yes, your interest rate matters but your strategy matters more. Home loans aren’t set-and-forget. Rates change. Life changes. Markets change.
One of the biggest traps borrowers fall into is the loyalty tax, where existing customers quietly pay more than new ones because they haven’t reviewed their loan. That’s why regular reviews are so important.
Sometimes the best move is renegotiating the rate. Sometimes it’s refinancing. Sometimes it’s changing the structure to suit a new stage of life. Importantly, the cheapest rate isn’t always the best loan.
Good strategy considers:
Repayments and buffers
Flexibility and features
Future plans
And choosing a quality asset
Over time, these decisions matter far more than chasing a rate that’s slightly lower.
Final Thoughts: Plan for Movement, Not Perfection
Interest rates will always move. That’s not a problem if your loan is set up with flexibility, buffers, and a clear strategy.
Rather than trying to outguess the market, focus on:
Understanding how rates work
Choosing a structure that fits your life
Planning for change, not avoiding it
Reviewing your loan regularly as things evolve
This is how you build confidence, even in uncertain rate environments.
If you want help reviewing your loan structure or planning for future rate changes, you can book a Get to Know You Chat.
And if you want the full conversation and examples listen to Episode 25 of First Home Unlocked.
