When it comes to home loans, a term commonly thrown around is 'interest rates'.
While you may have heard the word, knowing what it actually is, and understanding the different types of interest rates may be something that you are unsure of. To make it easier, we’ve created a simple guide that covers the basics of 'interest rates'.
An interest rate is the amount charged by a lender for a loan. To put it simply, the interest is the cost to ‘borrow’ the money needed for the home loan. The rates are usually expressed as a percentage.
Interest rates are calculated by the amount you repay your lender on your home loan, and used to help steer economic growth. The Reserve Bank of Australia (RBA) is responsible for appointing the cash interest rate. This is determined every month. Lenders and financial institutes then go on to use this set interest rate to create their own rates, either by aligning them with the cash interest rate or by choosing to increase or decrease them from that benchmark.
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 drop when the economy needs to grow, as 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.
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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.
Partially-fixed interest is like 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 let’s you take advantage of any cash rate decreases.
Interest rates are integral to any home loan, so it is important that you do your research before making any commitments to a lender. Talk to one of our Home Loan Specialist today to learn more about interest rates or find a low rate home loan option in 30 seconds online with Lendi.
If you wish to qualify for lower interest rates, it pays to have a good credit history, have saved a significant deposit and be fully employed. You may be considered a ‘risky borrower’ if you possess a bad credit score, aren’t fully employed or unable to pay bills regularly.
Speak to a Lendi Home Loan Specialist to discuss your options in full.
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Lenders want to know that you have a steady income. They will review your employment history to check if you move jobs every six months. The better your job security, presents less of a risk to the lender.
In Australia, the ideal deposit amount is at least 20% of the property value. If your deposit is less than 20% you may need to pay Lenders Mortgage Insurance (LMI) on top of your monthly repayments.
Improve your credit history and settle any personal loans and debts before applying to any kind of home loan. No debts equals a smooth home loan application.
It might be a good idea to request a copy of your credit report, a document that allows lenders to assess your ability to repay credit. You can obtain a free copy of your credit report from a number of existing credit reporting agencies in Australia.
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