Understanding Interest Rates
How mortgage rates work and what affects your rate
In this guide
Interest Rate Basics
Interest rates are the cost of borrowing money for your home loan. They determine how much extra you'll pay on top of the amount you borrow (the principal).
Key Concept
A 1% difference in interest rate can mean tens of thousands of dollars over the life of your loan. For a $500,000 loan over 30 years, the difference between 6% and 7% is approximately $110,000 in total interest.
How Interest Is Calculated
- Daily calculation: Interest is calculated daily on your outstanding balance
- Monthly charging: Most lenders charge interest monthly
- Compound effect: You pay interest on interest if not paid promptly
- Principal reduction: As you pay down the loan, interest charges decrease
Types of Interest Rates
Variable Rates
- ✓ Fluctuate with market conditions
- ✓ Usually offer more features
- ✓ Can make extra repayments
- ✗ Uncertainty in repayments
- ✗ Rates can increase
Fixed Rates
- ✓ Certainty of repayments
- ✓ Protection from rate rises
- ✓ Easier budgeting
- ✗ Limited extra repayments
- ✗ Break costs if exiting early
Split Loans
Many borrowers choose to split their loan, fixing a portion while keeping the rest variable. This provides a balance between certainty and flexibility.
What Affects Your Rate
1. Loan-to-Value Ratio (LVR)
The percentage of the property value you're borrowing. Lower LVR typically means better rates.
- LVR ≤ 60%: Best rates available
- LVR 60-80%: Standard rates
- LVR > 80%: Higher rates + LMI required
2. Credit Score
Your credit history significantly impacts the rates offered to you.
- Excellent (800+): Premium rates
- Very Good (700-799): Competitive rates
- Good (625-699): Standard rates
- Fair (550-624): Higher rates
3. Loan Purpose
- Owner-occupied: Lower rates
- Investment: Higher rates (typically 0.25-0.50% more)
- Refinancing: Often competitive rates to win business
4. Loan Features
Basic loans with fewer features typically offer lower rates than full-featured packages.
RBA & Market Rates
The Reserve Bank of Australia (RBA) sets the official cash rate, which influences mortgage rates across the market.
How RBA Decisions Impact You
- Variable rates: Usually change within days of RBA decisions
- Fixed rates: Based on market expectations of future rates
- Not always 1:1: Lenders don't always pass on full rate changes
Other Market Factors
- Bank funding costs
- Competition between lenders
- International economic conditions
- Regulatory requirements
Comparison Rates Explained
The comparison rate includes both the interest rate and most fees, giving you a better idea of the true cost of a loan.
Important Note
Comparison rates are calculated on a $150,000 loan over 25 years. Your actual costs may vary significantly based on your loan amount and term.
What's Included
- Interest rate
- Application fees
- Ongoing monthly/annual fees
- Valuation fees
- Most standard charges
What's Not Included
- Redraw fees
- Early repayment fees
- Late payment fees
- Government charges
Negotiating Better Rates
Top Negotiation Tips
- Know your current rate and compare with market
- Research competitor offers
- Highlight your loyalty and payment history
- Be prepared to refinance if needed
- Ask for fee waivers along with rate discounts
When to Negotiate
- Before your fixed rate period ends
- When you see better rates advertised
- After improving your financial position
- When your LVR drops below key thresholds
Leverage Points
- Multiple products with the bank
- Large loan amount
- Excellent payment history
- Professional package eligibility
- Willingness to switch lenders
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Key Takeaways
- • Small rate differences have huge impacts over 30 years
- • Your rate depends on LVR, credit score, and loan purpose
- • Variable vs fixed is about balancing flexibility and certainty
- • Always negotiate - lenders expect it and have room to move
Disclaimer: This guide provides general information only. Interest rates and lending criteria vary between lenders and individual circumstances. Always seek professional advice for your specific situation.