We do a lot of conveyancing matters and our clients often ask us questions about the interest rates on their loans. Here are the answers to some of the most common questions we are asked:
What is interest?
In simple terms, interest is the fee you pay to use someone else’s money. The amount of interest you pay depends upon a few things including which lender you are using, the amount of money you borrow, and the official cash rate set by the Reserve Bank of Australia.
Why do interest rates rise?
Interest rates are set by your lender but they are also influenced by changes to the Reserve Bank of Australia’s official cash rate. The Reserve Bank’s cash rate sets the market standard for borrowing and lending money. If the cash rate goes up, lenders will increase interest rates. If the cash rate goes down, lenders will lower interest rates. Well… most of the time.
How does the Reserve Bank set the official cash rate?
The Reserve Bank meets on the first Tuesday of every month to decide what rate to set as the official cash rate. Currently the official cash rate is 0.75%, which is a record low in Australia.
Generally speaking, if economic growth is slow then the Reserve Bank will lower the official cash rate. This (usually) means banks will lower the interest rate on your mortgage and you will (hopefully) spend money on other things, stimulating the economy. If economic activity is too high, the official cash rate is increased to reduce spending and increase loan repayments.
The Reserve Bank takes into account a number of things when setting the official cash rate, including:
- the inflation rate;
- the rate of unemployment;
- the consumer price index (CPI);
- the producer price index (PPI); and
- retail sales.
How do I know if the official cash rate changes?
The media usually reports on any changes to the official cash rate, however you can also check the Reserve Bank’s website where the official cash rate is listed on the home page.
How do fixed and variable loans differ?
At the start of your loan, the bank will set your interest rate. With a variable home loan, the interest rate may change over time – most likely when the Reserve Bank increases or lowers the official cash rate.
With fixed home loans, the interest rate is set for a period of time – anywhere from 12 months to 5 years. The interest rate will not change on a fixed loan during this time. Many people like having a fixed home loan because it provides certainty on the amount you need to repay each month. With a variable home loan, you run the risk that interest rates may increase to a point that you can no longer afford to meet the repayments.
How do I get the best interest rate for my loan?
The best thing you can do is shop around! Check out what banks are offering and see if you can get a lower interest rate than the one advertised. More often than not, lenders are happy to offer a better deal to people with a good credit history.
How can you help me?
Our lawyers are always happy to review and provide advice on your loan agreement. Some lenders even require clients to meet with a solicitor before they will allow them to borrow money. If you need advice and assistance, feel free to contact our office to make an appointment.