Interest Rates 101: What are they and how do they affect me?

With talk of interest rate rises across the media, the thought of owning your own home can be daunting. If you’re struggling to understand what all the fuss is about and how they come into play, we’ve broken down everything you need to know to make understanding your home loan interest rate simple.

When building or buying your first home, it’s common practice to borrow money from a lender in form of a home loan. Sounds easy, right? Unfortunately, there’s no such thing as free money, so the lender will charge you a percentage of your loan on top of your agreed amount in exchange for them allowing you to borrow the money.

Your interest rate is what is going to significantly impact your monthly repayments and your ‘distance to go’ when paying off your loan, that’s why it’s extremely important to keep track of ongoing updates to interest rates across Australia.

So, how does it work?

When you start the process of organising financing for your new home, conduct your research around which banks will provide you with the best service and interest rates for your loan. Open the conversation with your lender about your goals and they will assess your situation and provide you with an initial loan estimate to base your budget around.

Most lenders are open to lending you around 80-90% of your home’s value, so before entering into your negotiations make sure you have approximately 10-20% of your desired home’s value saved up and ready to use as a deposit. The amount of your deposit will be entirely dependent on the builder you use, your agreement with your sales consultant and the scope of your project.

The amount of interest you pay will also depend on your situation – whether you’re occupying your home or using it as an investment, if your rate is variable or fixed and the overall loan amount are all huge factors in the consideration of your rate.

There are two types of home loan that you may encounter: Principal and Interest or Interest-only. If your home loan is Principal and Interest, your repayments will be a small slice of your loan, as well as the interest you’ve incurred on top of that. These types of loans mean you’re paying off the amount you’ve borrowed and your interest, therefore though your repayments are a bit bigger, you’re paying off your loan faster! Interest-only loans mean you’re only paying the interest your principal incurs over a short time without making any repayments to your actual principal amount. Once your Interest-only period is over, be careful you’re not hit with a big bill for future repayments

All I hear about is interest rates increasing, what does that mean for me?

Home loan interest rates vary frequently depending on the economy’s financial climate, supply and demand, and inflation – that’s why you would hear about rising inflation rates frequently in the media. If you’re told interest rates have gone up, that means your next repayment may cost you a little more.

Think of it this way – when demand is high, banks can charge a higher interest rate as consumers will still buy, therefore increasing cash flow for the banks to continue providing more loans to others. When demand is not as strong, banks can afford to lower their interest rates to entice more people to obtain a loan.

I bet you’re thinking – but if I’ve already got my loan, why does this affect me? Unfortunately, if you have a pre-existing loan that doesn’t make you safe from interest hikes. Banks will generally roll these out across all loans under their home loan programs. In some cases, you may have negotiated a fixed interest rate for a period of time that may limit your exposure to the increases for a while, but what’s going on around the economy is still something to keep an eye on.

Your bank will communicate with you (usually via letter) if your interest rates go up, but it’s a good idea to keep an eye on the local news outlets and other reputable sources to keep you informed.

I want to start building now – what should I do?

If building your own home is your dream, there’s never a better time to open the conversation and start saving now. Contact your bank or a financial representative to discuss measures you can put in place to offset interest rate increases or plan for your best financial success. They can help you take advantage of beneficial schemes such as the First Home Owners Grant. When you’re ready to start putting your plan into action, contact our team at Lofty Building Group and we’ll help you make that dream come true.