The loan with the cheapest interest rate is not always the best option, and in some cases may actually cost you more money over the loan term. A competitive home loan will offer a combination of competitive rates, low fees and loan flexibility.
Many Australians are refinancing their home loan for a number of reasons, including to:
- Consolidate debt
- Borrow money to renovate or invest
- Secure a competitive home loan interest rate
- Move from a fixed home loan rate to a variable home loan rate, or vice versa
Refinancing your mortgage is not an easy decision. A Better Mortgage broker will help you do the sums, taking into account all the costs of mortgage refinancing, to help you determine whether or not refinancing is the right move for you.
Interest rate options
Interest rates are a major consideration for borrower’s when making a 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 predominantly by Reserve Bank policy while fixed rates are driven by the predicted trends in 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 your loan.
Variable interest rates
The Reserve Bank uses interest rates to manage consumer spending and thereby inflation. The decision on when and if to move the Official Cash Rate is based on a range of economic indicators, including the Consumer Price Index (CPI), wages data,employment 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 Cash Rate fluctuations.
And to make things trickier, in recent times we have seen that lenders may 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 home loan will go up or down during the loan term. Different lenders offer different features and rates on their variable home loan products and discounts based on the amount you are borrowing.
Fixed interest rates
Fixed rates are influenced by the wholesale money market. Fixed rates can be taken out for terms of 1 to 10 years. By Fixing a rate you get repayment certainty over a designated term. You are better off if variable rates increase but can be penalised if rates drop or you need to break the fixed rate early.
A Better Mortgage broker will help you navigate through the discounts and specials on fixed and variable interest rate loans to ensure your home loan is competitive and suits your lifestyle.
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 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. A mortgage broker will discuss other Items that may not be included or cannot be accurately reflected in the comparison rate calculation which 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.