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What You Need to Know About Mortgage Rates and Home Loans

What You Need to Know About Mortgage Rates and Home Loans
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No matter your circumstances – whether you are a first home buyer, self-managed superfund property investor or a couple looking to downsize – there are some things that affect us all. Here are the things you absolutely need to know before taking the property plunge.

How interest rates can affect you?

In essence, the Reserve Bank of Australia will lower the interest rate in order to stimulate growth. An interest rate is, in a broad sense, the cost of borrowing for consumers. When the interest rate is lowered, generally speaking consumers will have greater access to funds and will increase their spending, thus stimulating the economy.

Here’s how this can affect you and your mortgage. Whether or not your existing mortgages interest rate will change will depend on whether or not you entered into a fixed or variable rate loan. Generally, if the economy is doing well, the Reserve Bank will increase rates and consumers entering into a mortgage at this time are more likely to select a fixed rate. The opposite is, of course, true if the economy growth is slow or at a standstill. In such an instance the Reserve Bank will decrease rates to promote economic growth, which means consumers entering into a mortgage at this time are more likely to select a variable rate in order to enjoy the benefits of rate reductions.

It is important to do your research and, if you are applying for a loan through a mortgage broker, consult with them about what the best option is for you during the current economy.

What is the difference between ‘interest only’ and ‘principal and interest’ loans?

Deciding which type of loan to choose depends entirely upon your personal circumstances and situation. If you are a first home buyer or property investor one option will be more suitable for you than the other. Here is a summary of what the difference between an ‘interest only loan’ and a ‘principal and interest loan’ so that you can make the best decision for you.

A principal and interest loan means that with each repayment that you make to your loan, you will gradually be paying off the amount that you borrowed (the principal) as well as the interest. An interest only loan means that with each repayment that you make to your loan, you will ONLY be paying off the interest owed. In the case of an interest only loan, the principal is paid off in full at the end of the loan period, when you sell or when you switch to a principal and interest loan.

If you are confused about which loan type is right for you, a mortgage broker will have the knowledge you need to explain these to you as well as provide their expert advice as to which one may be best suited to your needs and circumstances.

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