Bank Interest Rates: A Guide

Banks decide their own interest rates. While important, the official cash rate set by the Reserve Bank of Australia (RBA) is not the only driver of the interest rates offered by lenders.

Banks’ costs of lending are affected in two key ways:

1. The RBA’s cash rate influences the interest rate that banks have to pay on the RBA cash market—a market where Australian lenders can lend and borrow funds from each other, also known as the ‘overnight market’. These interbank exchanges occur daily so that lenders can maintain their cash reserves.
2. In addition to customers’ deposits (which accounts for around 30% of banks’ funding needs), a key source of bank capital is international wholesale funding—such as offshore interbank lending and debt securities—which can be negatively impacted by increases in international interest rates.

Maintaining enough cash reserves to fund both bank operations and the demands of customers means that when a bank’s funding sources become more expensive due to higher rates—banks pass on those costs to retail customers through the interest rate charged on variable loans.

When the RBA last moved to raise the cash rate in November 2023 by 0.25%, all the major banks also immediately raised their variable home loan rate by 0.25%.

If you borrow money to buy a property, car or to take a holiday, the interest rate offered by the lender affects the size of your repayments.

Most Australians choose loan products with a variable rate—meaning it can increase or decrease at the lender’s discretion. While that provides an opportunity to benefit when interest rates decline, it can hurt when rates keep climbing.

Standard variable loan interest rates available on the market right now are:

• Between 6.5% to 9% across the ‘Big Four’ banks.
• From 5.9% to 9% for online and challenger banks.

Higher interest on home loan repayments is the primary reason for the current cost of living crunch in many Australian households. Mortgage interest charges rose over 40% in the 12-months to December 2023, according to the ABS’ Living Cost Indexes data.

This was largely due to borrowers rolling off a low fixed-rate—for some, locked in during the pandemic when the cash rate was at a record low 0.10%—to a considerably higher variable rate in today’s economy.

How Do Bank Interest Rates Affect Repayments?

Interest is calculated based on the loan amount (a.k.a. the ‘principal’ for a home loan), meaning you’ll pay less interest, as a proportion of your repayments, as you reduce the amount owing. This is the reason that choosing a principal and interest loan is recommended over an interest-only loan.

Here’s an example of the difference a few percentage points can make— based on using CommBank’s monthly home loan repayments calculator and assuming you’d borrowed $500,000 over a 30-year term:

• With an interest rate of 6%, you’d be charged over $579,000 in interest over the life of the loan.
• With an interest rate of 8%, you’ll pay over $820,000 in interest over the 30 years.

Of course, you can’t always access the lowest bank interest rates. The best rates tend to be for borrowers with a larger deposit—because a smaller loan-to-value ratio (LVR) presents less risk to lenders. You might also choose a product with a comparatively higher rate in order to access features like an offset account.

Most lenders also pass on official cash rate increases as higher interest paid on deposits—but often not in full, and not always consistently. This discrepancy led to an inquiry by the Australian Competition and Consumer Commission (ACCC) in 2023 into how banks set interest rates for savers.

The inquiry found banks’ tactics made it difficult for people to compare deposit products and find the best deal—including distracting introductory offers and attached conditions that are hard to keep track of.

ACCC Chair Gina Cass-Gottlieb said: “During our inquiry, we were concerned that several banks could not tell us how many of their customers had missed out on bonus interest, or which specific condition they failed to meet.”

Common Types of Bank Deposits That Earn Interest

Everyday transaction accounts rarely pay interest. To earn a yield on your savings in the bank you’ll usually need to open a separate high interest savings account or a term deposit.

There are two basic types of high interest savings account:

• Online savings accounts that let you earn interest while still being able to access your money as needed.
• Bonus savings accounts where you’re eligible for a higher rate of interest provided you meet conditions—such as make regular deposits of a certain amount and no withdrawals. If you don’t meet a bank’s conditions during a given month, you receive a much lower base rate.

While bank interest rates on savings are variable, you can also lock in a fixed rate by opening a term deposit. The catch is, you can’t access the money for the full term you commit to.

Here’s an example of some attractive bank interest rates on savings products on the market:

Bank Interest Rates on Online Saving Accounts

• Bank of Queensland Simple Saver (via myBOQ app): 4.85% variable interest rate.
• ANZ Save (via ANZ Plus app): 4.90% variable interest rate.
• Rabobank High Interest Savings Account: 5.75% introductory rate for four months, with a 4.40% standard variable rate.
• Macquarie Savings Account: 5.50% introductory rate for four months, with a 4.75% standard variable rate.

Bank Interest Rates on Bonus Saving Accounts

• ME Bank HomeME Savings Account: Up to 5.5% variable interest rate, with base rate of 0.55%.
• ING Savings Maximiser: Up to 5.5% variable interest rate, with a base rate of 0.55%.
• MOVE Bank Growth Saver: Up to 5.50% variable interest rate, with a base rate of 0.10%.

Bank Interest Rates on Term Deposits

• Qudos Bank: 5.20% fixed interest per annum for a term of 12 months.
• G&C Mutual Bank: 5.20% fixed interest per annum for a term of 12 months.
• Judo Bank: 5% fixed interest per annum for a term of 12 months.

You can read more in our guides to best term deposits and the best high interest savings accounts for Australians.