Compare Interest Rates Australia

Current cash rate: 3.85%

Current official cash rate determined by the Reserve Bank of Australia.

How do interest rates work in Australia?

Interest rates in Australia are set by banks, lenders and other financial institutions on loan products such as credit cards and home, personal and car loans, as well as deposit products like savings accounts and term deposits. Providers charge interest on loans and pay it on deposit products.

Generally speaking, interest rates vary depending on the type of product, how competitive a provider wants to make its loans and deposit accounts compared to others in the market, and sometimes based on the customer’s circumstances. At a broader level, however, the interest rates charged and paid by financial institutions to consumers are heavily influenced by the Reserve Bank of Australia’s (RBA) cash rate.

The cash rate represents the interest rate that banks pay when transferring money between each other. The RBA’s Monetary Policy Board meets regularly and decides whether to move the cash rate (either up or down) or keep it steady. This decision is guided by factors such as inflation, economic growth and employment levels. These meetings formerly occurred on the first Tuesday of each month, with the exception of January, but are now held eight times a year.

When the RBA makes an announcement about the cash rate, banks and lenders are not obliged to follow, but many will. If the cash rate rises, banks and lenders will generally pass on the costs to customers in the form of higher borrowing rates (home loans are typically influenced more than other credit products). They may also decide to offer higher interest rates on savings accounts and term deposits.

Conversely, if the RBA lowers the cash rate, then banks and lenders may follow suit by offering lower interest rates to borrowers, and also lower rates on savings and deposits.

What are the different types of interest rates?

For a typical borrower in Australia, banks and lenders offer two kinds of interest rates – fixed and variable ones. Each has different characteristics and works differently, but in some cases, the two can be combined into a split-rate loan.

When it comes to deposit products, banks typically offer variable rates on their savings accounts and fixed rates throughout the duration of a term deposit.

How do fixed interest rates work?

A fixed interest rate is one that is set at a particular percentage for a particular period of time, and will not go up or down during that period. A home loan lender, for example, may commonly offer borrowers a fixed rate for a period of one to five years, and throughout that time, the borrower’s repayments on the loan will remain steady.

An advantage of fixed-rate loans is the certainty they offer. If you lock in a rate for your repayments, then you’ll be able to make a budget knowing exactly how much you’ll owe each month, and you’re not at risk of your interest rate rising if your bank or lender chooses to raise rates during your fixed term.

A disadvantage of fixed-rate loans is that while the rate does not go up, it also does not go down, meaning that you’ll be locked into your current rate even if your lender lowers their rates on offer. If you wish to exit early from a fixed-rate loan, you’ll typically be required to pay a ‘break fee’ to your lender.

In a home loan context, fixed-rate loans tend to offer less flexibility. Features such as offset accounts and redraw facilities are less common on fixed-rate products, and compared to variable-rate products there are generally fewer lenders who will be willing to let you make additional repayments on a fixed rate, to bring down the balance of your loan.

How do variable interest rates work?

A variable interest rate is one that can go up or down, depending on the decision of your financial institution or lender, which may in turn be influenced by the movement of the official cash rate and other economic factors. On a variable-rate loan, your periodic repayments can go up or down, meaning you could pay less or more in interest per month, depending on your lender’s decisions.

One main advantage of a variable-rate loan is flexibility. In a home loan context, lenders will typically package variable-rate loans up with extras such as offset accounts and redraw facilities (often for a fee). These features can allow you to use your home loan as an everyday banking account, and even pay off the balance faster.

A disadvantage of variable-rate loans is their unpredictable nature. It’s not possible to be certain if and by how much your lender will raise their rates, and in an environment of rising rates, some borrowers may prefer the certainty of locking in a fixed rate to protect themselves from monthly repayments becoming too high. That said, variable-rate loans often start out cheaper than fixed ones to compensate for this, so it could be worth factoring this in when weighing up which interest rate type is preferable for your circumstances.

How do split rate loans work?

A split-rate loan is one that offers features of both interest rate types. In a home loan context, a lender may be willing to allow you to split one portion of your home loan into a fixed rate, and the rest into a variable one, at percentages that you’ll mutually agree upon.

This means that you can have part of your loan on a fixed rate, which will protect that portion of the loan from rate rises, and part on a variable rate, which will potentially allow you to take advantage of such things as offset accounts and redraw facilities.

How to compare interest rates when borrowing

If you’re thinking about borrowing money, it’s important to research and compare loans to find the one that might suit your needs, whether because of the features the loan offers or an attractive interest rate. If you’re comparing your options, you may look for one that has the lowest interest rate, but it’s worth bearing in mind that this loan might not actually be the cheapest one on the market, once you factor in fees and charges. This is where the comparison rate can help.

The comparison rate is a way of expressing the ‘true’ cost of a loan, once fees and charges are factored in along with the interest rate. Financial institutions in Australia are legally required to display the comparison rate of any advertised loan for consumers, alongside its interest rate. When it comes to some types of loans such as personal and car loans, your credit score may play a part in influencing the interest rate you’re offered.

If you have a history of paying bills on time and have no record of bankruptcies or defaults, you may well have a high credit score. Lenders may therefore be willing to offer you more favorable interest rates, as they may be satisfied that you’re not a risky borrower. Conversely, if you have a history of late repayments, defaults or bankruptcies, you may have a lower credit score, and lenders may charge you higher interest rates than those advertised or decline your loan application altogether, as they may feel that you pose more of a risk as a borrower.

You can check your credit score for free with Canstar or via the Canstar App.

How to compare interest rates when saving

If you’re looking to deposit money into a bank to save, then it’s important to think about your goals before deciding which kind of account to go with. If you’re saving for the short term, then you may consider a high interest savings account, that you can take advantage of to build your funds. On the other hand, if you wish to save for the long term, and have funds that you don’t think you’ll need to access, you may consider putting these in a term deposit. A term deposit is a bank account with a fixed term on it, and these can range from one month to five years. When you deposit funds into a term deposit, you will earn interest, but won’t be able to access those funds until the term is concluded. If your bank or lender does let you take money from your term deposit early, it may ask you to pay early withdrawal fees or interest penalties.

If you’re considering a term deposit for your savings, then it’s important to keep in mind:

• the interest rates on offer,
• if there’s a required minimum amount to deposit,
• how long you wish to deposit your money for,
• if the deposit rolls over automatically at the end of the term,
• whether and how you’ll be notified at the end of the term, and
• whether you will be allowed to make an early withdrawal should you decide to.

It’s also important to read the fine print when you sign up for any bank account. Some savings accounts advertise bonus interest, but will only pay it if you meet certain conditions such as depositing a certain amount each month, making no withdrawals, or growing your account balance.

Likewise, some banks will offer special interest rates for people who meet certain specific criteria, such as age. For example, some banks offer special higher-interest rate accounts for people under 35, so you may be able to take advantage of a deal like this.