Working out the interest rate on your home loan is actually pretty important. Unfortunately there’s a lot of people with a mortgage that don’t even know what interest rate actually applies to them!
By not being properly informed, you could be missing out on some great savings. Knowing your rate let’s you spot a good rate when you see it.
How is the interest rate calculated?
To find out how your rate is calculated, you will need to check your home loan contract. It’s in there! Normally this is determined by the lender, but most lenders will calculate interest daily based on the outstanding principal balance of your loan. While the calculations happen daily, you’ll only see the amount added to your loan balance at certain regular intervals (normally monthly).
What are all these different rates I see in ads?
Well, there are a few different descriptions of interest rates and the common ones that you will see include:
This rate is specified by the National Consumer Credit Protection legislation and was introduced to help consumer compare rates that they see advertised. This rate includes the regular interest payment rate and some of the costs that are incurred in the mortgage loan.
The formula is the same across every lender and is calculated on the interest rate and any other upfront or establishment fees and uses a $150,000 loan amount over a 25 year loan term and uses principal and interest repayments.
Keep this one in mind when comparing, if you see a really cheap interest rate advertised with a high comparison rate – you know there’s some fees in there that you need to be wary of.
Average Annualised Percentage Rate (AAPR)
The AAPR is another rate which could be used to compare home loans, though it’s not used as much as a Comparison Rate. This is based on the actual loan amount and how much is charged for it over a 7 year period. It doesn’t take into account government fees and service fees.
The cash rate. One that we hear about every month from the Reserve Bank of Australia (RBA). This rate is the interest rate that people in the market (mostly banks) pay to borrow money or charge to lend funds in the money market. This is a component that banks may use to set the variable interest rate of their home loans and makes up a part of the cost in them getting the money to lend to you.
After all, the money that you borrow has to come from somewhere right?