Residential housing loan rates

IBISWorld anticipates residential housing loan rates to decrease by 0.31 percentage points in 2024-25 to average 8.38% over the year. The cash rate significantly influences home loan rates. When the cash rate increases, the cost of borrowing rises for lenders, causing them to pass on the extra costs to borrowers through higher interest rates. The RBA has actively increased the cash rate since May 2022 to tackle inflationary pressures and has been steady at 4.35% from November 2023 to December 2024, reflecting the RBA's cautious approach to balancing inflation control with economic growth. This extended period of rate stability is the longest since the COVID-19 pandemic began, indicating a potential peak in the interest rate cycle. As a result, residential housing loan rates have remained elevated; however, with inflation easing and the cash rate stabilising, they're expected to decline in 2024-25, providing some relief to borrowers.

The cash rate is a significant factor dictating movements in standard variable home loan interest rates. This is because the cash rate is a key determinant of banks' funding costs; changes in this rate quickly translate to changes in market interest rates and housing loan rates. The difference between the rate banks borrow and the residential housing loan rate is referred to as a spread. Changes in this spread typically drive banks' profitability, but the cash rate remains a core component of housing loan rates.

The RBA steadily reduced the cash rate in the years leading up to November 2020, reaching a record low of 0.10%. Since then, the rate has either remained stable or increased. This lowered funding costs for banks and drove residential housing loan rates down over the two years through 2020-21. However, regulatory changes by the Australian Prudential Regulation Authority (APRA) limited this decline in residential housing loan rates over the period. APRA required major banks to hold more capital to cover their residential mortgage exposure. The RBA has steadily increased the cash rate since May 2022, leading to a rise in home loan rates over the three years through 2023-24. Overall, IBISWorld forecasts residential housing loan rates to rise at an average annual rate of 0.73 percentage points over the five years through 2024-25.