With the RBA’s policy moves making headlines and inflation still a hot topic in 2025, Australians are paying closer attention than ever to the numbers behind their loans and savings. One concept that often gets thrown around is the ‘nominal’ interest rate. But what does it actually mean for your mortgage, your savings account, or your next big purchase?
Nominal Interest Rates: The Basics
At its core, a nominal interest rate is the headline figure you see when you take out a loan or open a savings account. It’s the rate before accounting for inflation or compounding. For example, if your home loan advertises a 6% interest rate, that’s the nominal rate. It doesn’t factor in how much the real value of money changes over time.
- Nominal vs Real: The nominal rate is what’s stated; the real rate adjusts for inflation.
- Why it matters: Inflation erodes purchasing power, so the real return (or cost) can differ from the nominal figure.
- Example: If inflation is 4% and your savings account pays 5%, your real return is only about 1%.
Nominal Rates in Action: Mortgages, Credit Cards, and Savings
Understanding nominal rates can save you thousands over the life of a loan or help you choose the best place for your cash. Here’s how nominal rates are affecting everyday Aussies in 2025:
- Mortgages: Most home loan ads feature the nominal rate. In 2025, with the RBA’s cash rate hovering around 4.35%, major banks’ advertised variable home loan rates are between 6% and 7% nominal. But the real cost depends on fees, compounding, and inflation.
- Credit Cards: That 19.99% purchase rate on your card is the nominal annual rate. If you carry a balance, the real cost can be even higher due to compounding interest and inflation eating away at your buying power.
- Savings Accounts: With inflation still above the RBA’s 2–3% target, many ‘high-interest’ savings accounts in 2025 are offering nominal rates of 4–5%. Your true gain, though, depends on the difference between your rate and the inflation rate.
2025 Policy Updates: Why Nominal Rates Matter More Than Ever
This year, the RBA has signaled a cautious approach to rate cuts, with economists predicting only one or two cuts before year’s end. Nominal rates on new loans and savings products remain elevated compared to the low-rate era of the early 2020s. Meanwhile, inflation—though down from its 2022–2023 peak—remains sticky, hovering around 3.5%.
Key 2025 trends:
- Fixed vs Variable Loans: Many Australians who locked in low nominal rates during the pandemic are now rolling onto higher variable rates. Understanding the difference between your nominal and real interest burden is critical.
- Superannuation Returns: Many funds now clearly disclose both nominal and real returns. A nominal 7% annual return might sound great, but after inflation and fees, your real gain could be half that.
- Government Bonds: Investors are paying closer attention to the gap between nominal bond yields and inflation to assess true value.
How to Use Nominal Rates to Make Smarter Money Moves
Whether you’re a first-home buyer, a retiree, or just looking to grow your savings, understanding nominal rates—and how they differ from real returns—can help you:
- Compare Loan Offers: Always check the comparison rate, which factors in fees and compounding, not just the nominal rate.
- Calculate True Savings Growth: Subtract the inflation rate from your account’s nominal interest to estimate your real purchasing power gain.
- Assess Investment Returns: Don’t be dazzled by high nominal returns; always consider how inflation and fees affect your real outcome.
In 2025, with cost-of-living pressures still biting, a clear-eyed view of nominal versus real rates can put you ahead of the pack.
