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Can a government influence the interest rate on your home loan?

As the election nears, United Australia Party leader Clive Palmer has pledged to cap mortgage interest rates at no more than 3%. But is it possible to cap mortgage rates? And can a government really influence interest rates in Australia?

The latest advertisements from the United Australia Party (UAP) claim to promise a “maximum interest rate of 3% on all home loans for five years”. It’s a bold claim and one that’s sparking a lot of conversation given the RBA’s planned move in May 2022.

Three of the big four banks are currently predicting that the RBA could raise the cash rate as early as tomorrow, which would have implications for the mortgage repayments of millions of floating-rate Australians.

The interest rates you pay on home loans, as well as personal loans, savings accounts and term deposits, are determined by your loan provider – and influenced by the Reserve Bank’s cash rate. of Australia (RBA) (among other factors). When the cash rate fluctuates, interest rates generally follow suit.

For a politician to commit to controlling interest rates would be of significant public interest. But are interest rates really within the government’s ability to control?

Can a government influence the exchange rate?

So could an elected United Australia Party government influence the cash rate to keep interest rates around 3%?

Simply put, no. Not under current RBA mandates. It is important to remember what the RBA really is. It is the central bank of Australia, an institution that has no connection with politics.

According to the RBA’s website, it is to act “independent of the political process”, i.e. “it does not accept instructions from the government of the day on monetary policy”.

“This principle of central bank independence in the operation of monetary policy, in pursuit of agreed objectives, is the international norm. It prevents the manipulation of monetary policy for political purposesand keeps monetary policy focused on its long-term objectives,” according to the RBA’s website.

While the UAP has pledged to use the “power of the Constitution” to impose this 3% cap on lending rates, it is difficult to see how it could influence the RBA cash rate without major policy changes. the RBA and the law.

Can a government influence the interest rate on your home loan?

Although the RBA cash rate is one of the biggest influences on the actual interest rate of the home loan you will be offered by a lender, it is also at the discretion of the lender if and how they pass on these changes.

For example, throughout 2020 there have been several cash rate cuts in response to the impacts of COVID-19 on the Australian economy. However, not all banks passed on these rate cuts in full to their customers. In some cases, they only reduced their fixed rate home loans, not their variable rate home loans.

So could a UAP government in theory directly influence lenders to cap interest rates at a maximum of 3%? According to The Conversation, this may be possible, but highly unlikely due to unrealistic increases in government spending.

By “drastically” increasing government spending to pay homeowners the difference between their current interest rates and a maximum cap of 3%, you may be able to achieve this.

However, not only would this be at an incredible cost to the taxpayer, it would also mean that taxpayers were subsidizing other people’s mortgages. Plus, the government would help pay for all mortgages, meaning some of Australia’s wealthiest people with mortgages would qualify for that 3% cap, all subsidized with your taxpayers’ money.

At a time when the housing market is unaffordable, especially for renters, it seems more prudent to direct funding towards supporting landlords so they can get a foot on the property ladder, rather than draw on government funding to pay off their mortgages.

There are practical steps homeowners can take now to help reduce the interest they pay on their mortgage, not relying on the promises of UAP. With interest rate hikes on the horizon, learn how to make your mortgage payments more affordable today.

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