INTEREST RATES EXPLAINED
The biggest single cost of any loan, it is important to get your interest rate right before committing to a bank.
There are a few options here:
Your interest rate will generally move in line with the benchmark rate set by the Reserve Bank of Australia (except in exceptional circumstances as per the GFC)
Basically, Australian banks buy in the funds they lend to you and add a margin to the cost of those funds. The resultant interest rate is what you pay.
Variable rates are the most flexible in terms of repayments.
Variable rates should be chosen in the following circumstances:
- Rates are falling
- You want to pay out your loan quickly
- You want to make additional repayments on your loan
- You like the flexibility to change banks when you choose
You can pay interest only or principal and interest with a variable rate.
Your interest rate is fixed for a set period of time and will not change during that period despite of how the variable rates move.
Fixed rates provide surety of repayments as your interest rate does not change and your repayments remain the same.
You generally cannot make additional repayments with a fixed rate loan.
Fixed rates should be chosen in the following circumstances:
- Rates are rising
- You want consistency of repayments
- You are happy to stay with the same bank for the fixed period