For homebuyers, the home loan interest rate is one of the main factors to consider when purchasing a property. A change in interest rate can have a sizeable impact on your repayments and the total cost of your loan. It’s important to know what causes the interest rate to move and how to react if it does.
How Does The Interest Rate Affect Your Home Loan?
Interest rates determine how much interest you have to pay in each home loan repayment. The lower the interest rate, the less interest you pay. Suppose the principal remaining on your loan is $300,000, your annual interest rate is 2.24%, and the loan repayment type is interest-only. Your repayment for that month would be:
Principal x (annual interest rate/12)
$300,000 x (0.0224/12) = $560
If you want to know your home repayment amount, use our Home Loan Repayment Calculator.
What Factors Affect The Interest Rate?
Out of several factors that can change the interest rate, the most important are monetary policy, fiscal policy, economic growth, and the cash rate. These are determined by the Reserve Bank of Australia (RBA).
- Cash Rate: The cash rate is the interest rate on unsecured overnight debt transactions that banks engage in with one another. It is the primary tool the Reserve Bank uses to implement its monetary policy. In other words, the RBA manipulates the cash rate to influence inflation, employment rates, and demand in the economy. The RBA sets the cash rate 11 times a year (each month, excluding January). On the first Tuesday of the month, the RBA determines whether the cash rate needs to be increased, decreased, or left unchanged. If the cash rate increases, banks can be expected to increase their rates for consumers. If the RBA reduces the cash rate, banks often lower their rates, too.
- Fiscal policy: This refers to spending and taxation decisions the government uses to shape the economy. An expansionary fiscal policy means that the government is spending more and this ultimately leads to higher interest rates.
- Economic climate: Interest rates change due to the supply and demand of funds. If banks have lots of money to lend, then interest rates will be low; whereas, less money in supply means a higher interest rate.
There are other factors that affect the interest rate that the RBA has little control over:
- Housing market conditions: Home loan interest rates are mainly tied to the forces of demand and supply, so trends in the housing market affect the interest rate. For example, if there is an increase in houses being put up for sale and the purchasing power of consumers decreases, then the interest rate decreases. Even if the RBA does not change the cash rate, banks may change their interest rates to attract customers or increase revenue. Since there are only a handful of sources for funds, if one bank raises or decreases its interest rates, then other banks often soon follow suit.
- Owner-occupier vs investment home loan: An owner-occupier home loan usually has a lower interest rate than an investment home loan.
Contact our specialist mortgage brokers at 1300 889 743 or fill in our online assessment form and we will help you find the perfect loan.
Does A Change In Interest Rate Affect All Types Of Home Loans?
No. As a homebuyer, there are loan options that secure you against changing interest rates. Here are various types of loans and the effect changes in interest rates have on them:
- Fixed-interest loan: A fixed-interest loan locks in your interest rate for a period of time. This means that your interest repayments remain the same, whether your lender changes its rates or not.
- Variable-interest loan: As the name suggests, a variable-interest loan means the interest repayment can fluctuate with the rise or fall in your lender’s interest rate. A variable interest rate often comes with benefits like the ability to make extra repayments or add a lump sum to your loan.
- Split loan: You may like certain benefits of both a fixed-rate loan and a variable-rate loan. If so, you can opt for a split loan, wherein one portion of your loan is fixed while the other is variable. This protects you from unfavourable changes in the interest rate on at least a portion of the loan.
Our team of specialist mortgage brokers can help you choose the most suitable home loan. Contact us at 1300 889 743 or fill in our online assessment form and we will contact you.
How To Decrease Your Interest Repayments
If you have a variable-rate loan or a split loan, there are ways to decrease the interest you have to pay. These options may be available for fixed-rate home loans with some lenders as well.
- Extra repayments: Paying a large lump sum amount on your loan means that the amount of interest charged will be against a lower loan balance. With variable loans, you can make these extra repayments any time, whereas fixed loans require a fee to do so with most lenders.
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Offset account: If available with your lender, you can create an offset account within your home loan. You deposit funds into the account and each month, when the bank calculates interest, all or part of the balance in your offset account is deducted from your principal. For example, suppose, you have a balance on your loan of $400,000, your annual interest rate on the loan is 2.24%, and you have $40,000 in a 100% offset account. Your lender will subtract $40,000 from your loan balance when determining your repayment for the month. This means that the interest will be charged on only $360,000 not $400,000, saving you money:
$400,000 x (.0224/12) = $747
$360,000 x (.0224/12) = $672 - Refinancing your home loan: You can refinance your home loan with the same lender or move to a different lender that will give you a better deal. If your new home loan gives you a better interest rate or more features, you may save on your interest repayments.
Learn more about the benefits of refinancing your home loan here.
- Timing: When the RBA increases or decreases the cash rate, lenders usually forewarn their clients that the rate on their loan will soon change. Thus, you could opt to split your loan or make extra repayments if available from your lender, to mitigate a forthcoming increase in the cash rate.
How Can You Stay On Top Of Interest Rate Changes?
As mentioned above, the RBA decides on the first Tuesday of every month (except January) whether to change the cash rate. You can check the RBA’s latest cash rate here. You can even contact your broker or lender to learn of any forthcoming changes to the interest rate, so you can make an informed decision.
How To Get The Lowest Interest Rate For Your Home Loan
With the information above, you are ready to make informed decisions when your interest rate changes. Remember, countering changes in the interest rate can save you literally thousands of dollars on your repayments.
This is where our specialist mortgage brokers can help. By scouring dozens of lenders, we can help shape the perfect home loan for you.
To get started on the search for your dream home, please give us a call on 1300 889 743 or fill in our online assessment form.