Interest Rates Explained: What You Should Know in 2025

Interest rates are one of the most important factors when it comes to buying a home, refinancing, or managing your mortgage. But let’s face it – they can be confusing. As a mortgage broker, I get asked all the time about how interest rates work, why they change, and how they impact borrowers.

So, in this blog, I’m going to break it down in simple terms, covering everything from what they are, to what affects them and how they impact your mortgage. Let’s dive in.

What Are Interest Rates?

In basic terms, an interest rate is the cost of borrowing money. When you take out a home loan, you’re borrowing money from a bank or lender, and they charge you interest on the amount.

For example, if you have a loan of $500,000 at an interest rate of 4%, you’ll pay $20,000 in interest over a year. That’s a pretty significant cost, which is why it’s so important to understand how interest rates affect your mortgage repayments.

Why Does it Matter?

These rates directly impact how much you’ll pay each month for your mortgage. A higher interest rate means your repayments will be higher, while a lower rate means you’ll pay less each month. It also impacts how much you’ll pay in interest over the life of the loan.

What Affects Interest Rates?

There are several factors that influence our rates, and they aren’t just based on what’s happening in the property market. Here are the key things to know:

1. The Cash Rate Set by the Reserve Bank of Australia (RBA)
   The Reserve Bank of Australia (RBA) plays a big role in setting interest rates. They adjust the cash rate (the rate at which commercial banks lend to each other) to either encourage borrowing (if the economy needs a boost) or discourage it (if inflation is too high).

2. Inflation
   When inflation rises, the rates tend to go up as well. Inflation refers to the increase in the cost of goods and services over time. If inflation is too high, the RBA may raise rates to help control it.

3. Economic Conditions
   Strong economic growth might lead to higher interest rates, as the RBA works to manage economic stability. On the flip side, in times of economic slowdowns, the RBA might lower rates to help encourage borrowing.

4. Bank Competition
   Banks and lenders set their own rates too, based on competition in the market. If one lender lowers their rate, others might follow suit. However, if a bank feels like it’s not getting enough business, they may raise their rates to increase their margins.

5. Your Risk Profile
   Lenders assess your financial stability before offering you a loan. Your credit score, income, and how much deposit you have all play a part in determining your interest rate. If you’re seen as a higher risk, your rate could be higher.

Fixed vs. Variable Interest Rates: What’s the Difference?

When you’re choosing a home loan, you’ll often need to decide between a fixed and a variable interest rate. Both have their pros and cons.

• Fixed Interest Rates
  A fixed interest rate stays the same for a set period, usually one to five years. This gives you predictability with your repayments, but it may come with higher rates than variable loans. Breaking a fixed loan early can also result in penalties.

• Variable Interest Rates
  With a variable rate, your loan rate can change depending on what happens with the cash rate. If the RBA increases the cash rate, your interest rate might go up too. The benefit is that you can take advantage of lower rates when they’re available.

Some lenders also offer split loans, where part of your loan is fixed, and part is variable. This gives you the best of both worlds—some stability and some flexibility.

Why Are Our Rates Going Up?

Australian rates have been on the rise lately. So, why is this happening? There are a couple of reasons:

• Inflation
  Inflation is higher than usual right now, which is one of the main drivers of increased interest rates. The RBA is trying to keep inflation under control by raising the cash rate.

• Global Economic Factors
  The global economy is impacting Australia’s interest rates. Supply chain disruptions and rising fuel prices are contributing to inflation, which leads to higher rates.

• Demand for Loans
  More people are applying for loans as the economy picks up, which can drive interest rates higher. It’s a simple case of supply and demand.

How Rate-Payers Can Manage

If you’re worried about rising costs, here are a few tips to help you manage:

1. Refinance Your Loan
   Refinancing might help you secure a better rate, especially if your current lender is increasing rates. A mortgage broker can help you find the best deal available.

2. Pay Extra on Your Loan
   If you can afford it, making extra repayments can reduce the amount you owe and cut down on the interest you pay. Even small additional payments can make a big difference over time.

3. Consider Fixing Your Rate
   If you’re concerned about future rate hikes, you might want to consider locking in a fixed rate. This gives you more certainty about your repayments in the years ahead.

4. Review Your Loan Regularly
   Interest rates change, and so do your financial needs. Regularly reviewing your loan with a mortgage broker ensures you’re always on the best possible rate.

My Final Thoughts, Broken Down…

Interest rates play a crucial role in your home loan experience. Understanding what affects them and how they work can help you make smarter choices for your mortgage. Whether you’re buying your first home, refinancing, or looking to invest, knowing how to navigate interest rates will help you save money in the long run.

At North Brisbane Mortgage Brokers, we’re experts in finding the best home loan options for you. If you need advice on interest rates or want to explore refinancing options, get in touch with us today. We’re here to help you make the best choice for your financial future.