What influences the overall mortgage interest paid?
Interest is a tricky thing. A 4.5% annual interest loan may not seem like much at first sight, but you better believe over time it adds up. Because of this, it is important for homebuyers to understand what affects the interest rate they are receiving. And in turn, how much overall interest they are paying. Once understood, you’re in a much better position to make a decision that will stick with you for years to come.
What’s the problem?
There seems to be misconceptions when it comes to understanding co-relations between factors that determine the amount of interest you finally end up paying on the amount you borrowed to purchase your property.
To clear this out, we have decided to organise our discoveries in a few, simple points.
Ultimately, these are the factors we have analysed which we believe determine how much interest you eventually end up paying to your banks.
Factors affecting your overall interest paid on your home loan:
- The home-loan interest rate: This is based on many variables. For example the type of payment being made (principal plus interest to interest-only), whether it is an investment property or one you will occupy, the wholesale market, inflation, U.S treasury rates, the Fed and RBA rate and more.
- Fixed or variable: A fixed interest rate will usually sit a little higher than the present variable rate given. This is because due to its unchanging nature, the bank is taking on risk.
- RBA Official Cash Rate: The cash rate set by the RBA (currently 1.5%). This serves as a base rate, no interest rate is expected to fall below this number.
- Amount you borrow: The bigger the sum, the larger the amount of interest you will need to repay.
- Outstanding loan amount: As you pay off more and more of the money borrowed, you will be paying interest on a smaller amount, thus your interest payments will slowly reduce.
- Number of days in a month: The majority of lenders calculate interest on home loans daily and then charge that interest to you each month.
- The loan term: The less time you take to pay back the loan, the less interest you will pay. This will not only help you save money but also boost your wealth creating strategies.
- Repayment frequency: The more frequent your payments the less interest you will pay.
- Offset account or not: This allows you to reduce the amount of interest you pay on your loan by linking a transaction account to your eligible home loan. By opening up a savings or transaction account, you can “offset” daily against your balance. This creates an effect where the loan pretends you have paid the balance on the account off your loan.
Now that you’re all up to date with the ins and outs of your interest payments, it might be a good time to show your knowledge off with your broker or banker. For those of you who already own a home, now would be a good time to review your mortgage choice and understand if better opportunities await.
With LoanDolphin we can help you get connected to a trusted broker or banker who will provide you with the right mortgage solution with ease.