Home loan interest rates are a key and crucial concept for home buyers and as they move upwards again, there's plenty of talk around them. But keep calm and carry on because we're here to explain all the ins and outs of interest rates, so you can buy your dream home in smarter and faster ways.

How are interest rates decided?

1. Reserve Bank of Australia (RBA)

   The RBA decides the country's national cash rate - officially known as Australia's policy interest rate - on the first Tuesday of every month (except for January).

The RBA's main goals are for high employment, low inflation of between 2-3% and overall price stability across the country. During times of high economic stress, such as the past two years of COVID, the RBA will drop the cash rate to encourage the everyday Australian who may be out of work to buy essential goods at reasonable prices and help them to borrow. Inflation typically increases during such periods. Now that COVID is largely behind us, the RBA has begun spiking the cash rate to lower inflation. After an 18-month long period of just 0.1% cash rates, the RBA increased this figure to 1.85% earlier this month - and it's expected this figure will hike higher for at least the rest of this year.

2. Lender costs

After the RBA sets its rates, lenders then consider where and how they'll decide their own home loan interest rates as well as overall funding costs enabling them to borrow to lenders - and all this while remaining competitive in the market to attract borrowers and hopefully, continue to keep current mortgage-holders. As the RBA aims to balance inflation with interest rates, lenders also aim to balance how the RBA's lower or higher cash rate changes will influence their lending and funding costs.

Will lenders always change their home loan interest rates when the RBA does?

No, not always. Legally, lenders aren't obliged to pass on any rate changes to their borrowers, although those who do hike their rates after an RBA cash rate announcement may receive a warning from the government. But now in particular, you should expect to see changes to your rates after the RBA's monthly cash rate announcement. A lot depends on how eager lenders are to keep existing customers while attracting new ones and also, what type of mortgage you have (more on this later on) and the fees you're paying. If you're not happy with your lender's home loan interest rates, we recommend contacting them to see if you can work something out. Either way, get into the habit of keeping an eye on that first Tuesday of every month and what the RBA's potential changes will mean to your budget, especially as the onus is on you - not the lender - to do so.

What are the different ways I can pay interest on my loan?

There are three mortgage loan roads you can choose to walk, with each having pros and cons. The road you choose will depend on your personal financial situation and your plans for the future.

1. Fixed-rate loans

   This loan will ensure you can relax more than your variable or split loan neighbours on the first Tuesday of every month (although we still recommend keeping track of the RBA's cash rate decisions). We talked about fixed-rate loans recently but here are the key points to keep in mind. They're excellent for: + Risk-averse borrowers who want financial stability + Periods like the current one where interest rates are on the rise (as you're free from any such problems) But remember this: + You'll miss out on any rate drops + The longer the fixed term, the higher the interest rate - and fixed rates have already doubled in the past year + Don't expect benefits such as offset accounts and redraw facilities + Do expect break fee costs if you leave the loan plus fees for making extra repayments

2. Variable loans

   These loans are fantastic for periods when the cash rate is dropping as you're able to take full advantage of these changes. Obviously, however, this is not the case at the moment but there's still plenty to be said for variable loans. They're excellent for: + Overall lower interest rates than those of fixed-rate loans + Great benefits including offset accounts and redraw facilities + Enviable flexibility such as making extra repayments with no fees But remember this: + RBA cash rates are rising so you're at the mercy of such changes + Planning your financial future or even short-term budget in advance is difficult

Split, or partially fixed, loans

These loans can be an excellent comprise between fixed and variable loans, giving you the stability of a fixed rate and the flexibility of a variable rate. You can generally choose which percentage of the loan you wish to remain fixed and variable, with each being affected by market changes. For example, if 20% of your loan is fixed, only 20% of your loan will change according to RBA cash rates and vice versa for the variable part of your loan. They're excellent for: + Partial security from any interest rate hikes + Partial assistance such as no fees when it comes to repayments and other benefits But remember this: + You'll always be at the partial mercy of cash rate changes and similar + Your financial and short-term future and budget will need constant changes NB: Split loans are one loan that you'll apply for with a lender with the split of variable and fixed set beneath a single loan umbrella.

What is a comparison rate?

Lenders are legally required to provide comparison rates - and that's great as this information is extremely helpful when you're exploring interest rate possibilities. Comparison rates provide the "real" percentage rate you'll pay for your loan - or at least an average annual rate - based on a $150,000 loan over a 25-year term. These rates include the most common lender fees and charges (but not all), usually both upfront and ongoing, as well as the interest rate itself. While the comparison rate is an average percentage, it does give you a better idea of what rate you'll be paying over the life of your loan. So, while Loan Option A may offer a cheaper interest rate than Loan Option B,  the latter's comparison rate may result in it being the cheaper choice. NB: Comparison rates don't include government charges such as stamp duty and mortgage registration fees.

What is an Average Annual Percentage Rate (AAPR)?

This phrase is often used in place of comparison rates but it is different and even more important. AAPRs are similar to comparison rates in that they explore all fees and charges involved in a home loan rate (but not government charges). But they give you a far more accurate representation of your loan's total interest rate as they include every lender fee and charge, including "honeymoon" rates and introductory offers. These fees are also calculated over a seven-year period, using your actual home loan amount.

We’re here to help

What looks like a low interest rate may not actually be the case or even if it is, it may not be right for you and your financial plans. Everything is quite often not what it seems in the world of house buying! But the good news is that we can help you find the best home loan for your needs and priorities, no matter what your deposit adds up to. This includes refinancing or assisting those keen to invest in property or buying for the first time. We work hard to find the perfect loan for you and your unique financial situation from over 40 of Australia’s biggest banks and specialist lenders. So give us a call today at Lending Loop!