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How do interest rates work?

Interest is the fee a lender charges a borrower when they borrow money. It is paid back in addition to the loan amount borrowed. For example, an interest rate of 10% on a $100 loan will result in a total cost of $110 (loan amount plus interest). The higher the rate, the more interest you pay.

Therefore choosing the right home loan for you could save you thousands in the long term.

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Fixed rate vs variable home loans

Fixed rate home loans are usually for a set period of time, ranging between 1-5 years, and have two main advantages. Firstly, they make budgeting easier and secondly, interest rate rises won’t affect your repayments.

However, you may also encounter several disadvantages. Rate drops can become frustrating, as you will be paying more interest than you need. You typically don’t have the freedom to make extra loan repayments if you’re suddenly able to, without paying an additional fee. Additionally, fixed loans may have a break fee, which you will have to pay if you change or pay off your loan earlier than expected.

On the other hand, variable home loans provide greater flexibility and can become lower than what you were initially paying. By the same token, interest rates could also increase meaning, you’d end up paying more than you originally expected. Another disadvantage is you may also have difficulty budgeting for future repayments as the rates are often unpredictable.

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Splitting your home loan

house-on-coins-stack Splitting your home loan is perhaps your best bet if you want to experience the best of both worlds. It is common for people to fix 50% of their home loan as a form of risk management, while simultaneously utilising the benefits of a variable loan, such as making extra repayments.

Ultimately giving people the opportunity to pay off their home loan sooner than expected and affording them the peace of mind that comes with a fixed home loan.

Still not sure which of these options is for you? Have a look at our guide on split, variable and fixed rates.

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Tags: low interest, home loan, fixed interest, refinance, new purchase

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Important legal stuff

COMPARISON RATE WARNING: This comparison rate is true only for the example given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. The comparison rates are based on a loan amount of $150,000 over a loan term of 25 years.
Lendi is the trading name of Lendi Pty Ltd, a related body corporate of your licensed credit assistance provider, Auscred Services Pty Ltd (ACN 164 638 171, Australian Credit Licence Number 442372). We will never sell your email address to any third party or send you nasty spam, promise.
EXAMPLE: This example is current as at 20th October 2016. A Click Loans Online Principal and Interest Loan of $150,000 over 25 years has monthly repayments of $767. This is calculated based on the interest rate of 3.69%, comparison rate of 3.69%, upfront fees of $0 and annual fees of $0.
IMPORTANT INFORMATION: Loan terms of between 1 Year and 40 Years are available subject to lender and credit criteria. Maximum comparison rate will not exceed 14.99% (see comparison rate warning above). Any calculations or estimated savings do not constitute an offer of credit or a credit quote and are only an estimate of what you may be able to achieve based on the accuracy of the information provided. It doesn't take into account any product features or any applicable fees. Our lending criteria and the basis upon which we assess what you can afford may change at any time without notice. Savings shown are based on user inputted data and a loan term of 30 years. All applications for credit are subject to lender credit approval criteria.
Lendi is a privately owned and operated Aussie business. Our mission is to provide Aussies with the right experience when choosing a home loan from our panel of major and non-bank lenders including Click Loans which is a wholly owned subsidiary of Auscred Pty Ltd and a related body corporate of Auscred Services, your credit assistance provider. Although Lendi compares over 1600 products from over 30 lenders, we don't cover the whole market or compare all features and there may be other features or options available to you. While Lendi is 40% owned by founders and employees, we have also been supported by some great minority shareholders including Bailador, Macquarie Bank Ltd and a number of Australian sophisticated investors. We have an independent and founder led board.
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