GUIDES & RESOURCES

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.

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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 a suitable 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.

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