How Do Interest Rates Affect My Home Loan?

How Do Interest Rates Affect My Home Loan?

When you take out a home loan the money you borrow is called the principal, while the interest rate is the charge for borrowing the money, expressed as a percentage per year.

When you make a regular loan repayment it is comprised of two parts: principal and interest. People tend to compare lenders by their interest rate to see who offers the most competitive loan in the market. It’s understandable that most people pay close attention to interest rate as this has a great impact in their monthly repayments and to the overall cost of their home loan.

For instance, if you take out a $400,000 loan on a 6.5% interest rate over 25 years, you will pay more than $400,000 in interest. So it’s worth considering the interest rate of your home loan. If you want to know the amount that goes towards your interest verses principal, you can use our home loan calculator to see the difference.

Interest rates go up and down depending on factors including the cash rate set by the Reserve Bank of Australia (RBA) and your lender's cost of funds.

When it comes to changes to the interest rate, most lenders consider the cash rate along with their cost of funds. 

There are several features and types of interest rates homeowners can choose from, including:

Fixed rate – This allows you to have a fixed interest rate on your loan for a certain period of time. This means your repayments will stay exactly the same whether the interest rate of your lender goes up or down. The advantage of a fixed rate is that you won’t get affected by increased rates, and you know exactly how much you need to pay each month.

Variable rate – This is where your interest rate can go up and down. A variable rate loan gives you options not available to people with fixed rate loans. These include the ability to make extra repayments or add a lump sum to your home loan. However, you are exposed to the risk of increasing interest rates.

Split loans – You have the features of a variable rate and a fixed rate when you split your home loan. Meaning, one portion of your loan is fixed while the other is variable.

Knowing the advantages and disadvantages of the types of home loans is essential when comparing interest rates among various lenders. Apart from the mortgage types, you should also consider the other features available such as making extra repayments, a redraw offset facility account, or even an interest-only option which may help achieve your financial goals.

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