Interest rates, shop around and save!

May 24, 2017 eBankruptcy

Shopping around for the best interest rates can literally save you thousands! Meaning more money in your back pocket! That’s because even the slightest difference in rates can result in significant savings on your repayments. By keeping repayments as low as possible, you can reduce financial stress and prevent personal insolvency. Read on to understand more about interest rates and how you can save your hard-earned cash!

Types of interest rates
The national cash interest rate is set by The Reserve Bank of Australia and reviewed on a monthly basis. Individual credit providers are able to set their own rates and choose whether to go above, below or in line with the cash rate.

There are both advantages and disadvantages to each different type of interest rate available. All are discussed below:

Variable rate
Variable interest rates increase and decrease in response to changes in the cash rate, or other changes imposed by the credit provider.

Advantages include:

  • Rates will usually go down if the cash rate goes down, saving money on interest by lower repayments
  • There are usually no restrictions on additional payments, thereby paying the debt off quicker and saving on interest

Disadvantages include:

  • Rates usually go up if the cash rate does, so you may end up paying more money in interest.

Fixed rate
Fixed interest rates are locked in for a specified period of time, typically 1-5 years, and safeguarded from rises in the cash rate.

Advantages include:

  • Finances can be better controlled and planned as you know exactly what the repayments will be each month for the fixed term.
  • No effect if cash rate is increased

Disadvantages include:

  • No benefit to you if the cash rate decreases
  • Possible restrictions on additional repayments

Partially fixed rate
If you’re interested in the security of fixed payments you can budget on, but would still like to take advantages of decreases in the cash rate, a partially fixed rate may be for you. A partially fixed rate allows you to pay a fixed rate on a specified sum of the loan, and variable on the rest.

Advantages include:

  • Ability to have fixed payments that can be budgeted on, and a portion that can take advantage of lower cash rates
  • Additional repayments are usually allowed on the variable portion of the loan

Disadvantages include:

  • The fixed portion of the loan cannot benefit from decreases in the cash rate and can also incur fees for refinancing or early exit
  • The variable portion is subject to increases in the cash rate, and that portion of the monthly repayment cannot be exactly budgeted on

Comparison rates
It is also important to know that sometimes the lowest interest rate may not be the for long term value. Fees and extra charges can also add thousands to the total price of your loan. We recommend looking at comparison rates to make sure you are getting the best overall deal. The comparison rate includes the interest rate, and most fees and charges relating to a loan, reduced to a single percentage figure.

What is an LVR and does it affect my interest rate?
An LVR is your loan to value ratio, and it is calculated by dividing the amount your home loan totals by the appraised value (or purchase price) of the property. Your LVR can have a significant effect on your interest rate. In fact, most lenders will increase the interest rate if your LVR is higher than 80%. Therefore, calculating your LVR before purchasing property is important to ensure you qualify for lower interest rates. Another pitfall of having and LVR above 80% is the need for lender’s mortgage insurance, which can cost thousands.

If you are struggling to make your loan repayments and wondering what options you have available, contact us today or click here  to visit our health check page for a quick assessment of your financial health.