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Your simple guide to interest rates

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'.

What are 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.

Why do interest rates fluctuate?

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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Types of interest:

What is variable interest?

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.

What is fixed interest?

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.

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What is partially-fixed interest (split 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.

How can I qualify for a low interest rate home loan?

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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Tips to help you get a low rate:

Job security

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.

Access to a deposit

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.

Existing debts

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.

Check your credit history

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.

Talk to one of our Home Loan Specialist today and see whether you qualify for low interest rates in seconds.

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Tags: interest rate, standard variable loan, standard variable rate, fixed interest, refinance

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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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