Variable Interest Rates

Variable interest rates in Australia are generally set against the Reserve Bank’s “Cash Rate.” This rate is used by the RBA to make adjustments to monetary policy so that such things as people’s spending capacity can be controlled. By controlling our ability to spend, the Reserve Bank and the Australian government can achieve desired outcomes for such things as levels of employment and inflation, thereby controlling the economy.They do this by adjusting the Cash Rate up or down, dependent on whether they want us to loosen or tighten our spending habits. As the Cash Rate moves, so do our home loan variable interest rates. This adjusts your monthly home loan repayments so you either have more cash or less cash to spend. Recent reductions to the Cash Rate have reduced home loan repayment amounts and put more cash into people’s pockets. This was the Reserve Bank’s intention, hoping that people would spend this rather than sit on it, so that a demand for labour was created and more jobs would remain in the workplace.

In general terms, your interest rate is simply the sum of the Cash Rate plus an Investor’s Margin plus the lender’s Margin. For example if the Cash Rate is 3.00% your home loan rate might look something like this:
# Cash Rate 3.00%
# Investor’s Margin 0.50%
# Bank’s Margin 1.50%
# Your Rate 5.00%

Fixed Interest Rates

Fixed Rates are usually available for between 1 and 5 years, sometimes out to 10 years. Once you have locked into a fixed rate for a period the rate will not change during the period and your repayments will remain the same regardless of what happens to variable home loan rates. Fixed interest rates are not determined by the Cash Rate but it does have some influence. These rates are generally determined by long term money market investors and their views as to the future economy and what returns they need to make to be in a better position than simply leaving their money at the cash or call rate. It also gives them certainty of rate for a period.

Tips About Interest Rates and Fees

Fixed vs Variable

The quandary is always whether you will be better off with a fixed rate or a variable rate. There is no certainty of this so you must weigh up the known things and make your decision. There are currently many people locked into fixed rates at 9% while variable rates are around 5%. This sudden decrease in variable interest rates was difficult to foresee in early 2008. Some tips to help are:

• Some home loans don’t offer fixed rates so if this is important to you then you should check this before signing.

• Do you intend to keep your present home for the period of the fixed rate? If fixed rates decrease below your rate after you take it out, you will almost certainly incur what is known as a break cost and this could be substantial. If fixed rates increase during the period most lenders will not charge break costs. Read your contract carefully before you jump. You can read more about this in our free report Unlock Your Dreams. You can order a copy here.

• Fixed rates give certainty for a period. If this is important to you then you might feel more comfortable with a fixed rate rather than a variable rate.

• Where is the market at now? What are the fixed rates on offer versus the variable rates? What could happen to home loan rates in future? History shows that markets can move substantially in a fairly short period so be wary of locking into longer terms in periods of high interest rates.

• Read up on interest rates on a regular basis. Remain informed. This will help you to make decisions.

• Consider a split loan – some on variable and some on fixed. This might give some comfort.

• Be wary of “honeymoon rates” or “discount variable” rates. These can look very attractive, but often revert after the honeymoon period to a very high variable rate.

• The current interest rate market offers a smorgasboard of lower rates, including fixed rates. Variable home loan rates may drop further but we are presently experiencing the lowest home loan rates in 40 years. Fixed rates are also attractive and should be considered.

Home Loan Rates

When considering home loan interest rates, always remember that you usually get what you pay for. You will find that some “cheap home loans” will not have the features and flexibility you may want now or in the future. Cheap home loans may not offer fixed rates, redraw, interest only periods etc. So check what you get for your money before you buy. Cheap home loans are often cheap for a reason. That said, Iden Money offers fully featured loans at low variable interest rates.

Comparison Rates

Comparison Rates can be quite useful to compare home loans however they are not an exact science and will not include fees that are unknown on the date the comparison rate is determined, such as early repayment fees that are determined by the amount of time the loan has run. Comparison rates can be useful to compare home loans offering a honeymoon period, as the comparison rate will give a better idea of the true cost versus a loan without a honeymoon rate.

Help answer the question about discount interest rate

About Author

I am 23 year old student on my last year of study at the University of Sydney (Sydney), majoring in Information technology.Visit Iden money for Variable Interest Rates and other services they offer.