There are a lot of facts and figures thrown around in the world of finance but we can almost guarantee you have heard about interest rates. If you ask the dictionary it will tell you that interest rates are the proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage of the loan outstanding. If you ask a regular home owner, it’s usually the most expensive part of your budget.
So how is it calculated? The Reserve Bank sets a cash rate which is basically the interest that every bank has to pay on the money it borrows, from this each bank determines the interest they will charge on loans (they have to make money too). This is important when it comes to your home loan as it determines the amount of interest you will pay back over the course of your loan, your monthly repayments and how fast you can pay your house off. We know, important right!
When setting your interest rate on your mortgage you are either going to select a fixed or variable interest rate to pay for the duration of your loan. In recent years, with a steadily declining interest rate, many home owners have opted for a variable interest rate which fluctuates with the movements of interest as the RBA raises or lowers it – ride the way as they say. In addition, you can choose to fix only part of your loan with the fixed rate applying to anywhere between 30 and 100% of it! This is a great way to get a blend and often helps people feel more comfortable with fixed loans.
A fixed rate differs as you and the bank agree on a set rate for the duration of your repayments, something that feels particularly wise when interest rates are lower than market average. Did someone say 2020? One of the biggest advantages to fixing your loan is that your repayments will remain standardised and predictable. You are able to budget down to the dollar and know what to expect each month.
Thanks to a certain global pandemic thats been happening, we have seen interest rates fall to an all time low and fixed rate loans take the spotlight. While the average variable interest rate within Australia currently sits at 3.45%, the average fixed rates are as follows:
- 1-year, 2.82% (to a low of 2.19% pa)
- 2-year, 2.73%
- 3-year, 2.80%
- 4-year, 3.12%
With confirmation from the Reserve Bank that interest rates aren’t going to drop any lower it’s an excellent time to consider fixing your rate.
That’s where we come in. Get in touch to discuss whether securing a fixed rate is right for you, if you’d like to look into adjusting your rate or securing a new loan while the interest rates are looking very promising.