What are interest rates?

When it comes to home loans, interest rates are a very important thing to understand. These rates dictate how much of your monthly payments go towards your home loan.

It is important to know that interest is built into your home loan. Because of this, you need to know what they are, and how their change over time effects you and your loan.

When getting your home loan the loaner will layout a plan for your repayment – also known as the life of the loan. This shows the amount of time it is estimated to take you to pay back the loan making minimum monthly payments.

Because the interest is added into your loan, you will often see that the total amount you are set to pay back is greater than the amount you are actually borrowing.

This means that part of your monthly payment goes towards paying off the interest, so a payment of $3,000 a month is not actually putting $3,000 towards your home loan. This means that with an interest rate of 4 percent you could see a $600,000 loan end up costing about $900,000 over the life of a 25 year loan.

Who sets the interest rates?

The Reserve Bank of Australia are the ones who set a nationwide rate known as the “cash rate” which impacts the interest rates at which banking establishments can borrow money from other banks. With this interest rate in mind, banks then turn around and set their own interest rate for their customers.

So, while the Reserve Bank of Australia’s rate decisions impact what interest rates banks offer, it is up to the bank itself to decide what rates it will charge, and increasing or decreasing this rate is up to the individual bank’s discretion.

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