Why am I on the rate that I am on?
This can be a huge topic reaching into economics and monetary policy, but for now I'm going to concentrate on the different rates offered by lenders to their new home loan customers.
The Reserve Bank of Australia will meet a total of 8 times this year and one of the outcomes of these meetings is that they announce any changes to the target Australian cash interest rate. The current rate is 4.35% and these rates form the basis of the rates charged by lenders for home loans. While this cash rate is currently the highest it has been in over ten years, this graph in the Australian Property Investor Magazine predicts that rates will fall again after August this year. This graph doesn't go far back enough to the 1990's when rates were over 15%.
Predictions of rate rises and falls are very fickle. One set of adverse economic data changes everything very quickly.
Investment v' Owner Occupied loan
If you are borrowing funds for investment purposes your interest rate will be a little higher than if you are borrowing to buy your own home. Eg Suncorp basic variable loan 6.14% Owner Occupied v' 6.44% Investment.
Variable Rate Loans v' Fixed Rate Loans
Variable rate loans will have an interest rate that changes in line with the RBA official rates. At the time of writing (May 2024) almost all of my clients are opting for variable rate loans.
Most lenders also offer fixed rate loans where the rate is locked in from day one of your loan for 1-5 years as selected by you. At present fixed rates are very close to variable rates, but sometimes fixed rates are higher and other times they are lower than variable.
The upside of fixed rate loans is that you are protected from rate increases during the term of your loan. The downside is that you may miss out on rate decreases should official rates go down.
Traditionally if you made additional repayments to your fixed rate loan or closed it during the fixed term you would be charged a break cost. Happily most lenders now allow some level of additional repayments each year without break costs, this amount varies between lenders. If you are on a fixed rate loan and you have made additional repayments, in most cases you aren't able to redraw these during the fixed term. Fixed rates are not able to have offset accounts.
Interest Only V' Principal & Interest Loans
Investors often choose to have Interest Only loans where for a period (1-5 years) they don't repay the balance (principal), this is a common feature of construction and bridging loans. They do attract a slightly higher rate, and although initial repayments are lower, they cost more over the life of the loan as the balance is higher for longer.
Package V's Basic Loans
Most lenders offer a package loan where for an annual fee (usually $300 - $400) you will get a loan with an offset account and you may also be offered a fee free credit card. Some lenders have higher rates on their packaged loan, some are lower, so care should be taken that the fee you are paying is repaid via savings on interest through the offset or a lower rate.
Loan to Value Ratio (LVR)
Lenders often offer different interest rates depending on the LVR of the loan. Where a loan is over 80% of the value of the property, the interest rate will be higher, and some lenders will offer a discount on the rate if the loan is under 60% of the value of the property.
Loan limit x 100 = LVR %
Property Value
for example a loan of $800,000 on a property worth $1,000,000 = 80% LVR
Which loan & rate is right for you?
Speak to your mortgage broker who will assist you to find the best home loan rate for you. They are experienced at knowing what features are worth paying a higher rate. It may be a combination of several of the above features. Long story short - I would say that an owner occupied loan at 80% LVR with principal and interest repayments and a variable rate is about the most standard loan there is. Once you start adding additional features or changing the LVR, it will vary your rate. The rate that you see advertised, or that your mate is on may not be the rate that applies to your unique circumstances.
Examples of some rates today:
Newcastle Permanent - Owner Occupied Basic Variable rate loan LVR 60% = 6.09%
Westpac - Investment - Package Loan - IO repayments - Fixed - LVR 90% = 7.29%
Oh and that is the other thing - different lenders have different appetites for different types of lending. So the same loan and features may have vastly different rates at different lenders. That Westpac loan above - same features at Bank of Queensland = 6.49%
Want to know how your rate compares to the market? Would you like some additional features and need help to figure out if it is worth paying extra for them? Unsure whether the features you have are benefitting you?
Call Olivia the Broker and I can compare your rate to the market to see if there is a loan that is better value for you.
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