Interest rates influence everything from home loans to savings accounts, and understanding how they’re calculated can help you make better financial decisions.

In Australia, the Reserve Bank of Australia (RBA) plays a key role. Each month, it sets the cash rate – the interest rate on unsecured overnight loans between banks.

This rate acts as a benchmark for the rates you see on your mortgage, personal loan, credit card, or term deposit.

Here’s how it flows through:

1. RBA Cash Rate Decision – If the RBA raises the cash rate, borrowing generally becomes more expensive and saving becomes more rewarding. If it lowers the rate, borrowing becomes cheaper, but savings returns may drop. 
2. Lender’s Funding Costs – Banks don’t just rely on the RBA rate; they also factor in costs of sourcing money from domestic and overseas markets, as well as their own operating expenses. 
3. Margin and Risk – Lenders add a margin to cover profit and the risk that some borrowers might default. The riskier the loan (for example, unsecured personal loans), the higher the interest rate tends to be.
   

Example:
If the RBA cash rate is 4.35%, your bank might add 2% to cover costs and risk, resulting in a 6.35% interest rate on your loan.

Variable vs Fixed Rates

• Variable rates move up or down with the market, usually tracking the RBA cash rate changes. 
• Fixed rates lock in a set rate for a period, shielding you from immediate increases but also from decreases. 

Knowing how rates are set can help you compare lenders, negotiate better deals, and plan for changes. Even a small difference in percentage points can mean thousands saved (or paid) over the life of a loan.