How are interest rates determined?

With interest rate rises and official cash rate becoming buzzwords in the media for 2023 and 2024, you may be left wondering what it all means and how lenders determine the interest rates (aka ‘price’) of their home loans.

What is the official cash rate?

The official cash rate is the interest rate charged by the Reserve Bank of Australia (RBA) to financial institutions (that’s us!) and plays an important role in how interest rates are set. These changes help manage the growth of the economy, and impact costs involved with lending money.

What are the typical costs of lending money?

You might be thinking the margin that lenders make is just the ‘interest rate’ minus ‘the cash rate’, right? Not quite. There are four costs involved with lending money.

Cost of funds

The cost of getting access to funds to lend. This is typically made up of:  

• Deposit rates that are paid to deposit holders.
• Money borrowed in domestic and international markets.

Cost of insurances

The cost to manage differences in rate between different funding sources - this helps keep the rate steady, otherwise, you could see a lot more rate changes than you see today. This is made up of hedging positions (such as overnight index swaps) to help manage any mismatches in rate between the different funding sources. This is known as basis risk premium.

Cost of capital reserves

Whenever money is lent to customers, cash needs to be held to protect against any losses (e.g. loans that go unpaid) that may occur. This is required by regulators to keep Australia’s financial system safe.

Our margin

This is what Unloan recognises as our revenue. This revenue needs to cover the costs of running a lending business (including marketing, technology and salaries).  

So, how does Unloan keep rates low?

Unloan is built to deliver a simpler home loan experience at a lower price.  

As a digital lender, we’ve removed many of the traditional overheads to keep our costs low. These include:

• We don’t pay commission to brokers
• We don’t pay cash back incentives to customers
• We don’t have branches  

We also use technology to automate many of the traditional lending processes – making Unloan’s customer experience faster and simpler.

Unloan’s ongoing focus on simplicity and value allows us to continue offering a lower price to our customers.

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This article is intended to provide general information only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Please consider seeking financial advice before making any decision based on this information.‍

Unloan is a division of Commonwealth Bank of Australia.

Applications are subject to credit approval, satisfactory security and you must have a minimum 20% equity in the property. Minimum loan amount $10,000, maximum loan amount $10,000,000, and total borrowings per customer across all Unloan loans is $10,000,000. (For purchase loans a minimum 10% equity is required - however a Lenders Mortgage Insurance (LMI) premium and higher interest rate apply. In some cases, depending on the property’s location or type, an LMI premium may also be required for LVR between 70.01% to 80%). For loans with Lenders Mortgage Insurance (LMI) the minimum loan amount is $10,000, maximum loan amount is $3,000,000 and total borrowings per customer across all Unloan loans is limited to $3,000,000).

Unloan offers a 0.01% per annum discount on the Unloan Live-In rate or Unloan Invest rate upon settlement. On each anniversary of your loan’s settlement date (or the day prior to the anniversary of your loan’s settlement date if your loan settled on 29th February and it is a leap year) the margin discount will increase by a further 0.01% per annum up to a maximum discount of 0.30% per annum. Unloan may withdraw this discount at any time. The discount is applied for each loan you have with Unloan.

*At Unloan, we do not charge any annual, application, banking, account, transaction, late or exit fees. In certain circumstances you may be required to pay a Lenders Mortgage Insurance (LMI) premium. Learn more about why this is applied and how it works. Government fees may also apply. Learn more about government fees here. Your current lender may charge an exit fee when refinancing.