How Home Loan Interest Rates Work

Having a shelter is one of the fundamental needs of every human being, but building a house nowadays is a tall order. Especially when you have to invest savings of your lifetime to build your dream home. Even though, home loans comes as a convenient option to lend money for buying residential property, but understanding how their associated interest rates work is very important before you go out to look for a brokerage firm or credit union as these finance corporations make majority of their profit by charging interest rates on the money lent.

There are different types of home loans available in the market and can be categorized by the method in which the interest rate is charged example fixed and variable interest rates. Let’s discuss these categories in detail:

In Variable rate home loan the interest rate can vary over the complete tenure of the loan as per market situation, mostly it changes when Reserve Bank of Australia (RBA) meets over the monthly cash rate. Various other reasons like profitability, funding costs, RBA cash rates and bank enthusiasm for home loans also impact the change in rates.

Fixed rate home loan includes a predetermined rate of interest for a fixed tenure of time. The interest rates remain fixed and do not change even with Reserve Bank guidelines. This also enforces that your instalments remain same during the loan term. At the end of the loan, the interest rate is reset to the standard variable interest rates or the lender fixes a newly fixed loan tenure with the borrower.  

While opting for a home loan one must ensure to look beyond the advertised interest rates of fixed or variable rate since the real cost of the loan is not depicted through the set base rates. This is the reason that financial entities are legally bound to disclose the comparison rates which reflects the actual expenses taking into account the base interest rate, establishment costs and additional fees to express the percentage comparison. Thus making it convenient for the borrowing party to gauge the actual value of the home loan services.