If you’re looking to take out a home loan, you may have heard of “fixed interest rates” and “variable interest rates.” But how do banks and lenders set fixed rates? It’s actually a bit more complicated than you might think.

Cost of Funds

Firstly, banks and lenders will look at their cost of funds. This refers to the cost that the lender incurs to borrow money from other sources, such as other banks or the wholesale money market. Essentially, if the lender can borrow money at a lower cost, then they may be able to offer lower fixed rates.

Why do they borrow funds?

There have been instances of banks going out of business (The State Bank of Victoria in 1990 and The State Bank of South Australia in 1991), but this doesn’t happen very often in Australia. 

The reason for our relative stability is that there are regulations set up by the Australian Prudential Regulation Authority (APRA). This is an independent body that supervises banks, insurance companies and superannuation funds to ensure they operate in a way that keeps everybody’s money safe.

One of the ways that they do this is to require that banks have a certain level of funds available to them at all times. This might be so they can keep up with larger than normal withdrawals or payments that need to be made. 

Loan Profitability

The expected profitability of the loan is another important factor that lenders consider. They’ll look at a variety of factors, such as the borrower’s creditworthiness, the loan amount, and the loan term. This helps the lender determine how much they can potentially make from the loan, and what fixed rate they can offer.

Current Interest Rates

Finally, the interest rate environment plays a role in setting fixed rates. In general, if interest rates are low, fixed rates are likely to be lower as well, since lenders can borrow money at a lower cost. Conversely, if interest rates are high or expected to rise, fixed rates may be higher, since lenders need to factor in the risk of increased costs in the future.

It’s worth noting that different lenders may have different methods for setting fixed interest rates, and the specific factors that are taken into account may vary. Additionally, lenders may adjust their rates periodically to reflect changes in the market and other factors.


Overall, fixed interest rates on home loans and other financial products are set by banks and lenders based on a variety of factors, including the lender’s cost of funds, expected profitability, and the interest rate environment. By understanding these factors, you can make more informed decisions about your home loan and other financial products.