Money Talks: Does your interest rate suit you?

At the beginning of each month variable rate borrowers turn their attention to the Reserve Bank of Australia (RBA) in anticipation of the latest interest rate decision. Running through their minds is ‘will it go up and cost me more, stay steady and offer me a reprieve or, better yet, go down and help me save money?’

Although the RBA’s cash rate decisions offer a good indication of where interest rates are headed, what really impacts borrowers’ hip pocket is the rate charged by their lender.

Lenders’ interest rates are also based on a multitude of other factors such as their funding costs, competition for retail deposits, whether or not the customer is new or existing and the size of the loan amount applied for.

Sometimes, if you take out a larger loan amount and/or have other accounts or debt commitments with a lender you may end up receiving an interest rate discount. However, property buyers should always aim to borrow within their means (and then some) and avoid the potential for mortgage stress. For this reason, it is worth shopping around and visiting a reputable mortgage broker to find a lender and loan amount to suit your individual needs and circumstances.

Keep in mind some lenders will also offer a rate discount if you are contributing 25% or more deposit to the purchase, meaning your loan-to-value ratio (LVR) will be 75% or less. Having an LVR below 80% of the purchase price will also help you avoid paying lenders mortgage insurance, which can be a costly expense for borrowers.

Professional packages are another consideration for wanting a discounted interest rate and lower month fees, remembering they often have an annual fee and features such as a credit card attached.

With further interest rate rises almost certainly on the horizon, if repayments are really going to be a struggle you may wish to consider a ‘no-frills’ loan option. Basic variable loans are just that, that they do not offer many features or added extras but they usually come with a lower interest rate and a reduced or no monthly fee.

Often, rate discounts may be outweighed by the potential savings that can be made via loan features such as off-set accounts and/or increased repayment options. Think carefully about your loan decision.

If you are keen to compare your current mortgage’s interest rate and other features with those offered by other lenders, visit your local Mortgage Choice loans consultant for a free home loan health check.