Can a government influence your home loan interest rate?

In the run up to the election, United Australia Party leader, Clive Palmer, has pledged to cap home loan interest rates at a maximum of 3%. But is it possible to cap home loan rates? And can a government actually influence interest rates in Australia?

The latest advertisements from the United Australia Party (UAP) are claiming to promise a “maximum 3% interest rate on all home loans for five years”. It’s a bold claim and one that is driving many conversations given the predicted RBA move in May 2022.

Three of the big four banks are currently predicting that the RBA may lift the cash rate as early as tomorrow, which would have implications for the mortgage repayments of millions of Australians on variable rates.

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 of Australia’s (RBA) cash rate (amongst other factors). When the cash rate fluctuates, interest rates typically follow suit.

For a politician to pledge to control interest rates, this would be of significant public interest. But are interest rates actually within the Government’s ability to control?

Can a government influence the cash rate?

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

Put simply, no. Not under the current RBA mandates. It’s important to remember what the RBA actually is. It’s Australia’s central bank, an institution that has no connection to politics.

According to the RBA’s website, it is to act “independently of the political process”, that is “it does not accept instruction from the Government of the day on monetary policy.”

“This principle of central bank independence in the operation of monetary policy, in pursuit of accepted goals, is the international norm. It prevents manipulation of monetary policy for political ends, and keeps monetary policy focused on its long-term goals,” according to the RBA website.

While the UAP pledged to use the “power of the Constitution” to put this 3% cap on lending rates, it’s challenging to see how it could influence the RBA cash rate without major changes to the RBA and the law.

Can a government influence your home loan interest rate?

While the RBA cash rate is one of the biggest influences on the actual home loan interest rate you’ll be offered by a lender, it’s also up to the lender’s discretion if and how they pass on these changes.

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

So, could a UAP government in theory influence lender’s directly to cap interest rates at a maximum of 3%? According to The Conversation, it may be possible, but very unlikely due to the impractical increase in government spending to do so.

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

However, not only would this be at an incredible tax-payer cost, but it would also mean that taxpayers were subsidising other people’s mortgages. Plus, the government would be helping to pay for all mortgages – meaning some of the richest people in Australia with home loans would qualify for this 3% cap, all subsidised by your tax-payer dollars.

In a time of unaffordability in the housing market – particularly for renters - it seems more prudent to direct funding towards supporting homeowners to get a foot on the property ladder, as opposed to dipping into government funding to pay off their mortgages.

There are practical steps homeowners can take right now to help reduce the interest they pay on their mortgage, without relying on the pledges of the UAP. With interest rate hikes on the horizon, learn how to make your mortgage repayments more affordable today.

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