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Buying a home? You’ll likely need a mortgage. And chances are your mortgage will be the most significant loan you’ve ever taken out. Making mistakes with your mortgage can be painful because you can suffer from those mistakes for years and years.

 

To avoid mistakes and reduce your stress, learn as much as you can. Educate yourself about loan terms, types of loans and interest rates. In this post, we’ll review the basics of mortgage interest rates and how they can affect your loan.

 

What is Mortgage Interest?

Mortgage interest is a lender’s payment for taking a risk on lending you money. The interest rate has a direct correlation to the size of your repayments: the higher the interest rate, the larger your payments.

 

When interest rates are low, you can usually borrow more money. Therefore, you’ll likely want to shop around for the lowest possible rates. But before you start shopping, educate yourself about interest rates.

 

Interest is the cost of borrowed money expressed as an annual percentage of the loan. Let’s say you borrow $100,000 from the bank. If the loan attracts an annual interest rate of 5%, you’ll have to pay back the original amount you borrowed, plus $5,000.

 

In Australia, interest rates are influenced by the RBA Board, which is an independent board tasked with stabilising our currency. Every month, the RBA checks the prices of key indicators. This includes all kinds of products, from petrol to cheese and everything in between. The board notes price trends to check on inflation, and if inflation appears to be increasing dramatically, the board raises the interest rate. Banks will then increase their lending rates, which means homeowners and investors have less money to spend, and this puts pressure on inflation.

 

As you can see, timing can have a big impact on your housing purchase. If you happen to be looking for a home at a time when interest rates are low, you’ll be able to afford more or keep your payments low. If you buy when interest rates are high, you’ll spend more money on your loan.

 

Types of Interest Rates

Besides timing, the type of mortgage you choose will have a significant impact on your interest rate and the amount you can afford. Let’s take a look at the types of interest rates available today.

 

Principal and Interest (P&I)

With a traditional P&I loan, your payments will include the interest charge plus a portion of the original loan amount. Therefore, every time you make a payment, you reduce the amount you still owe on loan.

 

Interest Only (IO)

With an interest-only loan, you agree to pay only the interest for a certain amount of time, usually five years. Most IO loans revert to a P&I structure at some point. These loans are more expensive than P&I loans, and it’s more challenging to qualify for them.

 

Variable

Over the life of a variable loan, the interest rate will fluctuate, along with indicators such as the Reserve Bank Cash Rate. Some variable rates follow other gauges, so you should fully understand the details of any variable home loan you consider.

 

Fixed Interest

A fixed interest loan has an interest rate that stays the same for a set amount of time, usually two to five years. When the fixed amount of time ends, the interest rate will return to the lender’s standard variable rate (SVR), which will fluctuate with current market conditions.

 

Which kind of mortgage interest rate will work best for you? That depends on several factors, many of them personal. For instance, if you plan on owning your home for just a few years, you may want to take advantage of an interest-only mortgage. Alternatively, if you’re working to improve your credit and need a regular monthly payment, perhaps a P&I loan suits you best.

 

To talk with a loan specialist about the best kind of mortgage for your future home purchase, reach out to us at Altus Financial. We can work with you to secure a loan that will improve your overall financial health and reach your goals.