What Determines the Actual Interest Rate you Receive?


March 28, 2018

What Determines the Actual Interest Rate you Receive?

Did you get a good interest rate on your mortgage?

Once you get through the whirlwind of purchasing your new home and you have a chance to look back in hindsight at your loan, you may wonder if you got the best deal possible on your mortgage.

Becoming a homeowner and putting the keys in the door of your new house is pretty exciting. However, within all that excitement and anticipation, you may not have paid too much attention to the details.

In the case of a home loan, small details can add up to a lot of money. For example, if your lender’s interest rates are a tad higher than what other lenders are offering, you may end up paying an extra hundred dollars or more every month on your mortgage repayments until you refinance.

Should you worry about your mortgage interest rate?

No need to worry. You’ve just become a homeowner. Enjoy the moment and bask in your accomplishment. What you should do instead of worrying, is educate yourself.

Now that you do have your own home – and your own mortgage – it is time to start being a smart property owner. That means, it’s worth it to learn more about the essential factors that go into the real cost of your mortgage, and the elephant in the room for every home loan is the interest rate.

The good news is, the more you learn about mortgage rates and how they impact what you are paying, the better equipped you are to make changes to your loan so that you can optimise it for your needs.

Here are some reasons why you should check the interest rates before completing the deal.

Does a Higher Interest Rate Mean a Pricier Mortgage?

Every loan, including home loans, is going to have an interest rate associated with it. This rate determines how much you will pay each month above the cost of the principal amount of the loan. The higher the rate, the more you will pay.

On a short-term loan, a slight difference in interest rates is not going to make that much of a difference. However, when you consider the effect over the length of 20 or 30 years, a little difference in the interest rate could make a difference of tens of thousands of dollars! Here’s an example:

interest-rates-effect-on-loan

Naturally, this means you want the lowest rate possible on your mortgage. However, getting a low rate isn’t just about shopping around. You also have to be able to qualify for the lowest rates.

What Determines the Rate You Receive?

When it comes to the actual rate you are going to be offered, it will rarely be what you see advertised. This is because the advertised rate is likely going to be the lender’s best possible rate for people who have the highest credit scores. The actual rate you receive will depend on several factors:

  • Locked in Interest Rates. The first is whether you locked in your rate or not. When you apply for a mortgage, you have the opportunity to pay for a locked in rate. In other words, the going rate for that day will be given to you if the mortgage process is completed within a specified time, usually 60 or 90 days. Some lenders will not charge for a rate lock.
  • Credit Scores. A second factor in the actual interest rate you receive will be based on your credit score. The lower your credit score, the higher your interest rate will be and the smaller loan you will be able to get.
  • Lender Fees. Besides the personal factors that affect your interest rate, there may also be some additional fees, costs and charges. Some will come with any mortgage you get, but other fees may vary from one lender to another. These may not impact your rate, but they will increase what you’ll pay for your loan.
  • Lenders Mortgage Insurance. Having to get Lender’s Mortgage Insurance (LMI), if it is required, will also raise your Annual Percentage Rate (APR).

Can I Get a Lower Interest Rate?

If you can lower your interest rate, you stand to potentially save a lot of money and pay off your loan sooner.

There’s a lot of talk right now about Australian mortgage rates. That’s because rates have been remarkably low for a long time – the Reserve Bank of Australia chose to keep the cash rate at a low of 1.5% at the beginning of March 2018 and lenders are keeping their rates down to compete for customers. A lot of homeowners and first-time buyers are taking advantage of these low rates, applying for a home loan or refinancing now before rates go back up.

Look at it this way. The difference of a half percent in interest is equal to about $60 more you’ll have to pay each month on a $200,000 mortgage. Some people will choose to pay the equivalent of one point, about one percent of the loan, or $2,000 in this case, to get one-half percent lower on their interest rate. When paying $60 per month more for 30 years, it comes to more than $19,000 saved and reduces the loan period by over 3 years.

Another way to reduce the interest rate is to improve your credit score before applying for the mortgage. This cannot be done overnight. Things you need to do to boost your credit include: reducing your debt-to-income ratio to less than 20%, paying bills on time (most important), and checking to ensure that there are no mistakes recorded on your credit report.

A third way, which is a must, is to compare different lenders and see which one will give you the best deal. Be sure to compare services provided as well, and not just the interest rate. The features, fees, and the flexibility of your loan are all important factors.

The lower interest rate you can get will translate to a significant amount of savings over the term of a mortgage. It can make the difference between barely getting by each month, and actually being able to enjoy your new home. Or, you could even end up paying it off early and save even more money.


Written by Refinancing.com.au

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