If you want a home loan or you’ve already got one, paying interest is something you can’t avoid. However, there are steps you can take to make sure that you are getting the lowest interest rate possible. Here we explain what interest is, the different ways you can pay it and how you can pay less of it.
An interest rate is a fee charged by a lender for a loan. To put it simply, the interest is the cost to ‘borrow’ the money for a home loan, car loan, credit card, or any type of loan. The rates are usually expressed as a percentage.
Each month, the Reserve Bank of Australia (RBA) is responsible for setting the cash rate. Lenders and credit providers then go on to use this set cash rate to create their own rates. However, lenders are free to increase or decrease their rates independent of the cash rate.
Borrowers can choose to repay their loans at a variable (changing month to month) rate or a fixed (consistent for a set period of time) rate.
Lenders will calculate an individual's interest rate based on a number of factors related to how trustworthy they are and the risk associated with the loan.
There are several factors that can affect why one home buyer or borrower might qualify for a high interest rate while others may qualify for a lower interest rate. This usually depends on whether their lender finds the borrower’s situation to be high-risk or low-risk.
High-risk borrowers tend to have a higher interest rate, whereas low-risk borrowers are more likely to benefit from a lower interest rate.
Some of the deciding factors include:
LVR (Loan to Value Ratio)
Income and financial commitments
Lifestyle and living expenses
Credit rating (if it’s good or bad)
The deposit for the intended property
Current loans and debt e.g existing mortgages, credit cards and personal loans
Existing assets e.g. property
Value of the new property
If the borrower is an investor or owner occupier
If the borrower intends to make P&I repayments or Interest Only repayments
A lower interest rate home loan will mean that you pay less interest with each monthly repayment. A low interest rate can save you thousands each year, and tens of thousands over the full term of your loan. A difference of 1-2% points can save a household over $100k over the 30 year life of a loan.
For instance, households with a loan of $371,100 (the average Australian home loan amount) could save up to $162,458 over a 30-year loan by lowering their rate from 5.67% to 3.64%.
If you’re unsure if you’ve got the best rate, speak to a Lendi Home Loan Specialist today.
Not necessarily. You’ll need to consider the associated fees and charges that can add thousands to the cost of a loan.
Also, depending on your situation, some restrictions and loan features may not be the best fit for your individual needs. For instance, if you want the option to make extra repayments or use an offset account you may need to choose a loan with a slightly higher interest rate than the lowest available.
Your Home Loan Specialist can help you run the numbers to work out which option makes sense for your unique scenario.
There are three ways a borrower can pay their interest and which option you choose will be determined by your specific financial situation and future plans.
Variable interest rates increase and decrease based on both the RBA’s cash rate, and on any changes that your lender makes. If the cash rate is low, your interest rate is likely to also be low thus your home loan repayments will be less. However, there is a disadvantage. If an increase in the cash rate occurs, your variable rate is also likely to rise, and your repayments may be significantly higher.
Unlike a variable interest rate, a fixed rate allows you to maintain the same interest rate on a loan, regardless of changes in the cash rate for a fixed period of time. The period normally lasts for 1-5 years. This can be beneficial if there is an interest rate rise, as your repayments will not be affected. Therefore it's easier to budget as you know how much you have to pay back each month. On the other hand, if there are any cash rate decreases, you may find yourself locked into a fixed rate that is significantly more than if you had chosen a variable interest home loan.
You can learn more about fixed rate loans here.
Partially-fixed interest, otherwise known as split loans, provides the best of both worlds It is a combination of a variable and a fixed interest rate. If you do decide on a partially-fixed rate, you will be allowed to have a portion of your loan at a fixed interest rate, while the other is on a variable rate. Additionally, a split loan lets you have the stability and security of regular monthly repayments of the same amount, but lets you take advantage of any cash rate decreases.
Unfortunately, you can’t get a home loan without also being charged interest. To discuss your options and find out what low rate you could qualify for, speak to a Lendi Home Loan Specialist today.
Unfortunately (or fortunately), interest rates have a tendency to change. This is mainly due to inflation, changes in the economic market and property market conditions. They also change in accordance with the cash rate movements of the Reserve Bank of Australia.
The Reserve Bank of Australia changes the cash rate in order to maintain currency stability, economic prosperity and high employment. The cash rate is increased when the economy needs to be slowed down, as an economy that is growing too fast runs the risk of hyperinflation.
Therefore, interest rates can sometimes drop when the economy needs to grow, since weak economic growth has negative ramifications on employment, income amounts and the standard of living. While no one likes high interest rates, sometimes they need to fluctuate in this way to ensure nationwide economic stability.
Also known as the ‘true’ or ‘real’ rate, the comparison rate calculates the average interest rate with the addition of any other upfront or ongoing fees during the loan term. It is designed to help consumers compare home loans and lenders are usually required to display comparison rates next to each interest rate.
Comparison rates operate under fixed conditions, which considers a loan of $150,000 on a 25 year loan period with a principal and interest repayment method. Be aware that not all fees and charges are included in the comparison rate, so it's important to still check these for any loan you are considering.
While a home loan with a low interest rate is definitely going to appeal to borrowers, you shouldn’t take into account that rate alone. You should look at the comparison rate, as well as the interest rate.
The comparison rate takes into consideration a number of other fees as well as the interest rate. It is intended to provide you with a more accurate picture of the actual cost of your loan, alongside similar loans on offer from other lenders.
The comparison rate includes all fees and will factor in any additional charges by the lender. While a loan may have a low interest rate additional charges, such as establishment and valuation fees, may increase the amount you’d need to make in repayments, so that you could potentially end up paying more. The interest rate alone does not reflect this.
The comparison rate also reflects the principal amount of the loan, the loan term, and how often you’d be making repayments. A loan may have a low interest rate, but that interest will still add up over time. The longer the loan term (the longer you take to pay off the loan) the more interest you will accrue. A longer loan term could potentially see you pay more money back in interest, despite the low interest rate. The comparison rate will reflect this, while the interest rate alone will not. Keep in mind however, the comparison rate is not always the rate you will pay as circumstances can affect interest rates.
Similar to the comparison rate, the AAPR calculates the real rate of a home loan. It takes it a step further and takes into account honeymoon rates, ongoing fees and introductory offers. The AAPR takes your actual loan amount and calculates the rate over a 7 year period.
Although both the AAPR and comparison rate attempt to do the same thing, which is to determine the most accurate and real rate of your mortgage, the AAPR is seen to be a more accurate representation. Since a vast majority of loans used today exceed $150,000, comparison rates are used as more of a guide for determining the cost of your loan in the long run. The AAPR doesn’t include government fees and service fees such as redraw, since most of them are usually free. However, the AAPR could be considered as a more accurate reflection of your overall loan rate over its term.
The answer to this question will depend on your individual situation i.e. what your current interest rate is, your LVR, and if your credit rating has changed since your current loan settled. You can find out if you qualify for a lower interest rate home loan by comparing over 30 lenders around Australia in seconds with Lendi. If you are eligible, a Lendi Home Loan Specialist can do the hard work of dealing with the lender and submitting your loan for you.
Read our guide to refinancing your home loan here.
Traditionally, choosing a home loan was a cumbersome process. You would need to review all home loan credit products available, assess the terms and conditions as well as the individual rates and product information.
Nowadays, you can skip the hassle of searching through hundreds of home loans by finding a home loan online. All you need to do is tell us a bit about yourself, your needs and preferences and our technology will match you with the right loan for your situation. Once you’ve chosen your loan, we’ll do the hard work of submitting your application and guiding your loan to settlement. Plus, our experts are on-hand every step of the way to answer your questions and offer advice.
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