Interest rate terms you should know
Principal and interest loans
Offset accounts and redraw facilities
Offset accounts work as an everyday transaction account. The difference though is that when the bank calculates the amount owing on your loan, they include the money in this account. This means that there is less owing on the loan, and you pay less in interest.
Redraw facilities work similarly to offset accounts: you can place extra money into your redraw facility, which counts as extra repayments towards your home loan.
Interest-only loans are often set for five years, and during this time only the interest on your home loan is repaid. This means that you are not paying off your principal amount, but you’re paying the bank significantly less money. The downside is that your principal amount sits and accrues interest, meaning you end up paying more over the term of your loan.
Fixed-rate home loans
Fixed-rate loans have a constant interest rate for a fixed number of years. They provide you with less risk than the variable rate. However, with this security usually comes extra restrictions on your home loan.
Variable-rate home loans
Variable rates are based on the Reserve Bank of Australia, so they often change depending on the cash rate set by the Reserve Bank of Australia.
If you want to know more about the differences between fixed-rate and variable-rate, then read this article here.
Now that you’re familiar with the basic terms, let’s get cracking!
Our top 5 tips for getting the best interest rate
1. Get your documents and evidence ready
When it comes to the interest rates, banks often provide better rates to those with strong, stable finances. Getting your credit reports and documents ready is a crucial first step in applying for a loan.
2. Weigh up your mortgage features and priorities
Set your priorities and decide what features are essential to your loan according to your circumstances. Is a low interest rate the only thing you’re after? Or do you need an easy way to make additional repayments? What about a user-friendly online interface? Thinking about these early means you won’t get sucked in by extra nice-to-haves that might end up costing you more than you bargained for.
3. Compare different loans
With the amount you can afford to borrow, compare loans from at least two different lenders. Check the loan interest rates, fees and features to get the best loan for you.
4. Research the banks’ lending criteria
Each bank will have its own criteria that you need to satisfy before they’ll give you any money. Common things they’re looking for are your age, whether you’re a permanent resident, income, expenses and credit score. Once you know what criteria you’re likely to satisfy and what you won’t you can narrow the field down to the loans that best suit your circumstances.
5. Set up your savings plan
Having a savings plan to manage how you’ll divide up your finances between your loan and other expenses will help you in maintaining a better financial standing and therefore, a better interest rate.
Securing a low interest rate is a critical factor when getting your home loan, but the process can be complex and overwhelming. It’s always better to seek advice from an expert.
We can help you to get through this process and walk the road with you. If you’ve got a home loan question, get in touch with us here.
Disclaimer: The information provided is general in nature and does not constitute financial advice. Please speak to us for recommendations on your individual circumstance and requirements.
Mitchelle Katsande is Head of Marketing and Communications at Benevolence Financial Group. Mitchelle currently holds a degree in International Business and Finance and is currently supported by Macquarie University Incubator and City of Parramatta Council.