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When a central bank raises its main interest rate, banks usually raise the rates they charge on loans, so variable-rate loans get more expensive and savings accounts pay a little more. When the central bank cuts rates, the reverse tends to happen. Fixed-rate loans don’t change until the fixed period ends.
Every time a central bank such as the US Federal Reserve, the Bank of England or the Reserve Bank of India announces a rate decision, searches spike for one question: what does this mean for my loan? The short answer depends on what kind of loan you have.
How a central bank rate reaches you
Central banks set a benchmark rate that influences what it costs banks to borrow money. Banks pass that cost on. They don’t always move by the same amount or at the same speed, but over time loan and savings rates tend to follow the benchmark up and down.
Variable vs fixed loans
| Loan type | What happens when rates rise | What happens when rates fall |
|---|---|---|
| Variable or floating-rate loan | Your rate and usually your monthly payment go up, often within weeks | Your rate and payment usually go down |
| Fixed-rate loan | Nothing changes until the fixed period ends | Nothing changes, but you may be able to refinance |
| Credit cards | Card rates often rise soon after | Cuts are often passed on slowly |
| Savings accounts and deposits | New rates tend to rise | Rates tend to fall |
Why your payment might not change straight away
Some lenders reset variable rates only on certain dates. Others keep your monthly payment the same and extend the loan term instead, which means you pay for longer. Check your loan agreement or ask your lender which method they use.
What you can do
- Know your loan type: look at your latest statement for the words fixed, variable or floating.
- Compare refinancing offers when rates fall, but include any early repayment or switching fees.
- Prepay if you can: extra payments on a variable loan cut the interest you pay when rates are high.
- Shop for savings rates when rates rise, because banks don’t always pass increases on to existing accounts.
Frequently asked questions
How quickly do banks pass on a rate change?
It varies. Some variable loans reset within a month; others only at fixed review dates. Savings rates often adjust more slowly than loan rates.
Should I switch to a fixed rate?
Fixing gives certainty about payments but can cost more if rates later fall. It depends on your budget and how long you plan to keep the loan. A qualified adviser can help you compare.
Do rate changes affect existing fixed loans?
No. The rate is locked for the agreed period. It matters only when the fixed period ends and the loan moves to a new rate.
Sources
- US Federal Reserve: monetary policy decisions
- Bank of England: how interest rates work