How will interest rates affect my mortgage?


There's a lot to consider when choosing the best home loan. At the top of every homeowner's list of concerns is interest rates. How much should you expect to pay? How do interest rate fluctuations impact your mortgage payments? And, most importantly, how can you keep costs down? 

To make things easier, we've compiled a list of advice to help you get the best out of your borrowing when choosing your next home loan.

Let’s get to the following commonly asked questions: 

  • What is interest
  • What is the relationship between interest rates and mortgage payments?
  • Why are interest rates a crucial factor in determining mortgage affordability?
  • How can borrowers stay on top of fluctuating interest rates?
  • What strategies can borrowers employ during periods of rising interest rates?

Q1. What is interest?

Whenever you take out a home buyer loan to finance the purchase of your new property, your lender will expect you to pay the money back in instalments, usually over a term of 25-40 years.

Every mortgage repayment can be split into two parts: Principal and interest. Principal is the actual money you borrow and need to pay back. Interest is the additional monetary percentage your bank adds to the principal to make a profit on your loan. 

It’s crucial to stay informed about your home interest rates, as they can significantly impact the money you pay back each month.

Q2. What is the relationship between interest rates and mortgage payments?

To understand how interest rates affect your mortgage payments, let’s look at an example.

Suppose you've borrowed $300,000 on a 25-year mortgage repayment term at 6% interest. In this case, you'll actually pay over $579,000 by the time you complete your loan term.

Now, let's assume the same loan has an interest rate of 6.5%. In this instance, you'll pay over $607,000. That's $28,000 more than a 6% interest rate loan. In comparison, with a 5.5% interest rate, you would pay around $552,000, $27,000 less.

Q3. Why are interest rates a crucial factor in determining mortgage affordability?

With the above example in mind, it's easy to see why homeowners must keep a close eye on their interest rates. A high or low rate can impact the affordability of your mortgage over the long term. A home loan repayment plan that initially seems manageable may become hard to handle if interest rates increase. 

For this reason, it's vital to assess your interest rates before you sign a deal. In addition, always check for fluctuations during your loan term to ensure you aren't left out of pocket further down the line.

Important: The easiest way to find the best deals is to compare home loans from different lenders. Assessing the comparison rate of various offers gives you confidence that you're finding the best home loan option. A home loan repayments calculator also offers a simple way to check how much you'll pay based on the proposed interest rate.

Q4. How can borrowers stay on top of fluctuating interest rates?

Interest rates aren't static. They fluctuate due to changes in the economy. A rising interest rate means you could end up paying more on your monthly mortgage payments. If it falls, you'll pay less.

Staying informed about changes in the cash rate and the actions of lenders can help you navigate a potential rate rise effectively.

Changing interest rates can be a source of anxiety for homeowners. Fortunately, there are ways to stay on top of fluctuations. The key is to pick the right loan type for you. Let's explore the different repayment options available.

  • Fixed-rate home loans: A fixed-rate loan has fixed interest rates. This means the money you pay back each month won't change, regardless of interest rate fluctuations.
  • Variable home loans: With a variable-rate loan, your interest rate will change depending on the market. Variable-rate loans are all about risk versus reward. If interest rates fall, you'll save money on your monthly home loan repayment. Conversely, rising interest rates mean your monthly payment will increase.
  • Split home loans: Splitting your home loan gives you the features of both fixed and variable-rate home loans. In short, one part of your loan is fixed, and the other variable.

Choosing the right home loan type is just one piece of the puzzle. If you're trying to save where you can, it's also important to consider additional costs, such as home loan application costs and ongoing fees. Many lenders will also offer extra benefits that can help you out when times are tough, such as offset accounts and redraw facilities.

There are a few more things you can do to stay on top of interest rates:

  • Check the news regularly: The Reserve Bank of Australia (RBA) often announces changes to the cash rate, which can have a significant impact on interest rates.
  • Sign up for interest rate alerts: Many lenders offer interest rate alerts, which will notify you when the interest rate on your loan changes.
  • Use a home loan calculator: This will help you to estimate how changes in interest rates will affect your monthly payments.

By staying on top of interest rates, you can be prepared for any changes and ensure your mortgage payments are affordable.

Q5. What strategies can borrowers employ during periods of rising interest rates?

Rising interest rates can be stressful for property owners. If you're concerned about making your monthly mortgage payments when interest rates change, here are some ways to stay on top of your finances.

  1. Transition to a fixed or split loan: Rising interest rates mean those with a variable loan must pay more each month. To avoid this, consider switching to a fixed or split loan. Although you won't see any cost savings when interest rates fall, you'll have the added security of knowing how much you’re expected to pay.
  2. Change lenders: Refinancing your home loan with a different lender can allow you to find a better deal and lower the interest you pay. To get started with switching, choose WeMoney. Our home loan service enables you to evaluate comparison rates, apply for different lenders, and find the right home loan deal to suit your needs.
  3. Make additional repayments:  Making lump sum payments whenever possible reduces the length of your loan term, lowering the total interest you'll pay in the long run.

Summing up

Interest rates don't have to be stressful. By making some clever choices and being prepared to switch lenders when your current home loan isn't working out, it's easy to stay on top of your budget and keep rising home loan interest rates at bay.

If you liked this article, check out the rest of our blog. We regularly post insightful information about personal finance in Australia. If you’d like to learn more about this topic, why not try our full guide to how home interest rates work?

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Disclaimer: The author is not a financial advisor, and the information provided is general in nature and was prepared for information purposes only. This article should not be considered to constitute financial advice. Accordingly, reliance should not be placed on this article as the basis for making an investment, financial or other decision. This information does not take into account your investment objectives, particular needs or financial situation.

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