Your home loan interest rate is the fee charged by your lender or bank over the life of your loan. Your interest rate is the cost you pay to loan the money from the bank, usually expressed as a percentage. For example, an interest rate of 5% means you pay 5% interest on the value of your loan over a set period.
Your home loan repayment is the amount you repay to the bank, based on your interest rate. These repayments are paid at regular intervals, usually weekly, fortnightly or monthly. Your home loan will be over a set time period – usually 25-35 years. Your loan repayment will consist of two parts – your principal (which is your borrowed amount) and the interest (charged at a set rate based on the value of your loan).
The Reserve Bank of Australia (RBA) meet on the first Tuesday of every month where they decide on the set cash rate. Banks then set their own interest rates based on this cash rate. It is important to note that lenders often do not follow the RBA in all rate decisions, and it is up to the discretion of each individual lender whether to pass on full rate cuts and hikes.
There are two types of repayment schedules to choose from: Principal and Interest (P&I) or Interest Only (IO). A P&I loan means you are paying off the actual value of the loan as well as the bank’s fees. An Interest Only loan means you are only paying the bank’s fees, and not actually paying off any of the loan itself. Interest Only loans are often capped for a certain period of time, whereas your lender will then move you over to a P&I loan. In other words, you cannot stay on an Interest Only loan forever.
When deciding upon your home loan structure, you will decide whether to go on a fixed rate for a set period of time or a variable rate. We have discussed these two options on our previous fixed and variable loans pages. Once you have decided upon your home loan structure, it is time to negotiate the best rate possible with your lender. Lenders will look at various things to determine the level of risk you pose to them as a borrower. These things can include your:
A comparison rate is your lenders average interest rate plus all other fees and charges to give one complete rate. It allows borrowers to compare lenders and not be fooled by clever marketing or sales techniques. Lenders are required to show their interest rate and comparison rate together so borrowers can make informed decisions and compare lender to lender.
At Organic Home Loans, we are here to assist you to negotiate the best interest rate and repayment schedule for your home loan. We cut through the red tape and provide you with the facts. The more informed you are about banks’ expectations and requirements, the greater your chance of a successful outcome.
Let our home loan experts help you choose the right home loan structure an negotiate the best interest rate possible so you can find the home of your dreams
