Current Location： Local Lifes Local News Interest rates explained: Five common home loan questions answered
Whether you’re looking to buy your first home or your tenth home, interest rates will play a big part in your decision-making process.
Back in the 1990s, borrowers were paying as much as 17 per cent interest. Fast-forward to 2000, and the average interest rate was a little over 8 per cent – a lot better than 17 per cent, but still nearly twice the 2020 average of around 4.5 per cent.
So, what exactly drives interest rates, and what do you need to know about them before you sign up for a home loan?
While every lender is allowed to act independently, home loan interest rates are generally based on the cash rate set by the Reserve Bank of Australia (RBA). The RBA is tasked with issuing Australian currency and setting the country’s monetary policy to maintain financial stability.
The cash rate, which is the interest rate the RBA offers on unsecured overnight loans between banks, is reviewed monthly. On the first Tuesday of every month, the RBA announces the rate that will take effect the following day.
When it comes time to choose between lenders, it’s important to be able to compare apples with apples. While interest rates are a great starting point for comparing loan products, they don’t reflect the full cost of a loan, which will include various fees and charges. So lenders must display a comparison rate when advertising their home loan rates.
In theory, the comparison rate gives you apples where interest rates can deliver a mixed fruit bowl.
The rate is calculated by adding the interest rate with all other applicable fees (for example monthly account, establishment, valuation and settlement fees) and representing this as a single percentage figure.
A comparison rate is considered a more accurate reflection of the cost of a loan than the interest rate; however, it doesn’t cover government stamp duty, conveyancing fees, break costs or the cost of special loan features like offset accounts.
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