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How Interest Rates Affect Your Home Loan
The interest rate on your home loan can make a big difference to the amount you end up paying back, so it’s no surprise that many home owners keep a close eye on official interest rate changes.
Understanding how home loan interest rates work and comparing the rates on offer is an important part of choosing a loan that works for you.
Here we explain how interest rates are set and how different types might affect your home loan.
How are Interest Rates Set?
Interest rates can go up and down based on a number of influencing factors including the cash rate set by the Reserve Bank of Australia (RBA) and, importantly, the discretion of your lender.
The RBA reviews the official cash rate on the first Tuesday of every month and may decide to cut it, increase it or keep it the same. For example, between June 2012 and November 2016 the cash rate either stayed the same or decreased by increments of .25%.
When setting home loan interest rates, lenders consider the cash rate along with a range of other financial information. Lenders can choose to pass on to customers any, all or none of a cash rate increase or decrease.
How to Compare Interest Rates
When comparing interest rates, be sure to consider the overall cost of the loan. Lenders are required to list a ‘comparison rate’, which includes both the interest and the fees. This helps you identify the true cost of the loan.
It’s a good idea to become familiar with the different types of interest rates, as this can help you choose the right home loan for your personal circumstances.
The most common types of interest rates are variable and fixed, but you may also see split interest loans and introductory rates.
Variable Interest Rates
With a variable loan, your interest rate can fluctuate with market interest rate changes. This means you may end up paying more if there is a rate rise, but can work in your favour if rates go down.
There are two types of variable loans: standard and basic. Standard variable loans typically offer a range of features, while basic variable interest loans tend to come with lower interest rates, but fewer features.
Fixed Interest Loans
The interest charged on a fixed home loan is locked in at the same rate for a specified period – typically one, three or five years.
This can provide a degree of security for those wishing to budget and plan ahead, and means you are protected from rate rises during the fixed period. However, you’ll miss out on any rate cuts.
Split Interest Loans
There is the option of a split loan or a partially fixed rate, where one portion of your loan has fixed interest and another portion is variable. This allows you to take advantage of interest rate changes and additional repayments, while keeping a portion of your repayments stable.
Some home loans offer an introductory interest rate, which is a discounted rate of interest for a specified period at the start of the loan. The rate will go up when the introductory period ends, so it’s important to check what the increase will be.
Other Home Loan Features to Consider
It’s essential to note that comparing interest rates is just one step in finding the home loan that’s right for you. It’s equally important to consider which home loan options and features will help you achieve your financial goals.
For example, you may want a home loan that offers:
- Additional payments. Some loans don’t charge customers when you make extra repayments towards your home loan, which may help you pay off your loan quicker.
- An offset account. This is a savings account attached to your home loan. The balance of your savings is deducted from the principal amount of your loan, which reduces the amount of interest you are charged each month
- Redraw facilities. Redraw facilities allow you to access any extra money you’ve deposited into your home loan on top of your minimum repayments.
Working with a qualified mortgage broker can help make choosing the right home loan interest rate and features a lot less stressful.
Finding the right home loan with a great interest rate is easy with iSelect. Call 13 19 20 to speak to a qualified broker, or start comparing home loans now.