Finding a better interest rate
People refinance for a number of reasons, including to:
- Borrow money to renovate or invest
- Consolidate debt
- Take advantage of lower priced or better structured loans
- Switch between fixed and variable rate home loans
The decision to refinance may not be an easy one. Do your sums carefully, taking into account all the costs of refinancing, to determine whether or not this is the right move for you, and consult a mortgage broker for further assistance.
How do interest rates work?
Interest rates are a major determining factor in many borrowers’ decision to refinance, so it’s important to understand how they work.
Most borrowers are aware there are two types of interest rates - variable and fixed. Each type is based on different financial market indicators: variable rates are driven by Reserve Bank policy while fixed rates are driven by the wholesale money market.
Thrown into the mix is the Comparison Rate, or Annualised Average Percentage Rate (AAPR), a figure designed to show you the “true” cost of the loan.
Variable Interest Rates
The Reserve Bank uses interest rates to manage people’s expenditure, and thereby inflation and the economy in general. The decision on when and if to move interest rates is based on a range of economic indicators, including the Consumer Price Index (CPI), wages data, jobless figures, the Producer Price Index (PPI) and the performance of global financial markets.
The variable interest rates of lenders generally move up and down in line with official interest rate fluctuations. In recent times we have seen that lenders are also free to move their variable rates outside official Reserve Bank movements, and will do so when the cost to them of providing funding increases.
This means the interest rate on a standard or basic variable rate loan may go up or down during the loan term. Different lenders offer different features and rates on their variable loan products, generally according to the amount you are borrowing.
Fixed Interest Rates
Fixed rates are linked to variable rates, but the driver behind changes is different. Where a variable rate is influenced predominantly by the view of the Reserve Bank, fixed rates are influenced by speculations of investors in the wholesale money market.
Lenders base their decisions on fixed rate pricing on bank bill swap rates. Keep an eye on the 90-day bank bill swap rate: when it drops and lenders start following suit, wait for the market to stabilise and then look at fixing your rate.
As a general guideline, over time the average standard variable rate comes in at around 7.5 per cent per annum, so fixing at higher than this for a long period of time may cost you money.
However, you should keep in mind discounts and specials on fixed rates are a relatively safe way for lenders to compete for your business because refinancing during a fixed term is rare, so you can get a good rate if you keep any eye out for this type of deal.
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Comparison Rates
The comparison rate, or Annualised Average Percentage Rate (AAPR), of a loan can be a useful indicator of the overall costs you will have to pay out over your loan term. It takes into account upfront fees, honeymoon rates, ongoing fees, different compounding periods and other factors to produce an average yearly interest rate that reflects the overall cost of your loan.
It’s important to note that while useful, even a comparison rate will not show all the costs associated with your loan. Items that may not be included or cannot be accurately reflected in the comparison rate calculation include: occasional and one-off charges such as redraw fees, exit fees and penalties; loan features such as portability; and non-standard loan terms and loan amounts.
It’s also important to consider factors outside just the interest rate and comparison rate that will have an effect on the usefulness of your loan. The loan with the cheapest interest rate is not always the right option, and in some cases may actually cost you money over the loan term. Fro example, it can be worth paying a little bit extra for the option to make extra repayments if you know you will be in a position to take advantage of it and reduce your loan balance and term.
For more information on better interest rates
For more information on interest rates, refinancing or the home loan that is in your best interest, talk to your local mortgage broker and we will return your enquiry within 2 business hours. Or call us at any time on 13 LOAN or direct on +61 2 9249 3739.
