To lots of people, property speak may as well be a foreign language.
Let’s go back to basics!
What are interest rates, exactly?
When you use someone else’s property, you normally pay rent or a fee to use it. Interest rates can be thought of as the rent you pay to use someone else’s money.
The higher the rate, the more you have to pay, because loan amounts vary, the “rent” is expressed as a percentage.
How is interest calculated?
Interest is calculated based on the amount still outstanding.
For example, if you borrow $100,000 at 10% annually, then you’ll have to pay $10,000 in interest. Most interest is calculated throughout the month and can be paid weekly, fortnightly, monthly etc.
What are the different types of interest rates?
An interest rate can be fixed, variable or split.
A fixed rate means the lender is offering you a loan at a pre-agreed interest rate, for an agreed period of time, usually one to five years.
The rate of interest won’t change in that period. You can think of it like a big block of ice that will melt at a known and predictable rate.
With a variable rate loan, the rate of interest will be changed by the lender when they want, such as when the Reserve Bank changes interest rates to speed up or slow down the economy. “This means your ‘rent’ can go down or up.
A split rate means a loan has some fixed and some variable rate portions. The first provides certainty and predictability and the second provides flexibility.
What is the RBA?
The RBA is the Reserve Bank of Australia and is one of a number of government bodies which influence how fast the economy grows.
They’re looking for long-term, sustainable growth. They don’t want our economy to be like the marathon runner who goes out too hard and collapses in a heap. The speed needs to be right.
The Reserve Bank does this by lowering the benchmark ‘cash rate’, to stimulate the economy – for example, so more people buy homes and spend on goods and services – or ‘tapping the brakes’ with an interest increase in the cash rate.
What is the ‘cash rate’?
The RBA sets the nationwide cash rate, which is effectively the rate banks can borrow money from each other at, which influences the interest rates banks charge their customers.
The official rate is not definitive though, and banks decide what rate they charge, as well as whether they will change their interest rates in line with RBA decisions.
What have interest rates done in the last few years?
For almost 20 years, interest rates have been reducing.
Home loan rates of 18% are now a distant memory of the 1980s. This was a reflection in part of what was happening in the global economy and the Australian economy.
What about the future, then?
If you ask 10 economists (about what they predict will happen with interest rates this year), you’ll get a dozen opinions!.
Generally speaking, economists are expecting the next movement in interest rates to be an increase, but opinions differ on when. The consensus seems to be sometime in late 2018 or early 2019.
What should first-home buyers do?
First-home buyers may never have had such a large loan before, so adjusting to the mortgage payments can take a bit of a change.
Most of my first-timers have taken a split loan – for example, 50% fixed for predictability and 50% variable, so they can pay down as much as they like.
My other piece of advice is to shop around, as there are some great offers out there that your current bank won’t tell you about!
If you have any further questions or need some real estate advice be sure to contact me
0425 761 116 najeeb@onlyestateagents.com.au