When buying a property, usually you will borrow a mortgage up to 80 or 90% of the property value. The amount you borrowed will be called the principal while the cost charged by the lender is calculated by the interest rate. The interest rate will have a large impact on the overall amount you pay back and that’s why it’s imperative to understand how interest rate works.
To be honest, your interest rate will mostly depend on the current market conditions. However, there are still a few factors other than the current market that will affect it.
- Loan Type: There are mainly two types of home loans, owner occupied and investment. An owner-occupied loan is a type of loan you obtain while buying a home you intend to live in. If you plan to buy a property for renting or flipping, an investment loan will be lent. The key difference between the two is that investment loans often have higher interest rates than owner-occupied loans.
- Interest Rate Type: There are also two types of interest rates, variable and fixed. A fixed interest rate loan is a loan where the interest rate is constant for the term of the loan. On the other hand, variable interest rate loans have rates that change over time depending on an underlying benchmark or index that periodically changes. Borrowers will benefit from variable interest rate loans in a declining interest rate market while fixed interest rates will cost less if interest rate increases in the future.
- Loan to Value Ration (LVR): When borrowing a loan, lenders will look at how risky the loan might be by checking your credit score, current financial situation and most importantly how much you want to borrow. LVR is the ratio of the loan to the value of property you intended to purchase. LVR gives lenders a brief idea about your capability of saving and the potential risk of lending such loan. The more money a person has saved for the property, the lower the risk there is for the lender. Therefore, the interest rate tends to be lower if your LVR is lower since the risk for the lender is lower.
When choosing a home loan, other than the interest rate, another important factor you need to look out for is the comparison rate. The comparison rate shows you how much interest you will actually pay for the loan. It is calculated by combining the interest rate with other charges and fees involved. Here are some factors that will be taken into account :
- Establishment and valuation fees charged when you take out the mortgage
- Ongoing fees charged monthly or annually throughout the life of the loan
- Your repayment frequency
The comparison rate is deigned for customers to easily compare the true cost between different products and choose wisely. Here is a simple example. Loan A is more attractive if you only look at the interest rate but Loan B is the better choice if you consider all the fees.
However keep in mind that the advertised comparison rate is calculated based on a normal set of criteria and works as a guide only. The actual comparison rate on your loan usually varies depending on your specific circumstances.
If you are currently considering a mortgage, KBRZ offers a wide range of loans with low interest and comparison rates. Please click here for more details and feel free to contact us for any enquiry. You can also talk to us on WeChat or phone.