By taking the time to understand how home loan interest rates are calculated, you can make better decisions around the best lender to partner with for your mortgage. This article will help you explore the different options and determinants when it comes to the interest rates being offered by different banks and lending institutions.
The mortgage packages that are offered by banks and lenders are influenced by many different factors including:
1. Cost of Funds
This refers to the cost that a bank incurs to source the money that it is being provided to you for your mortgage facility. Australian banks usually fund their mortgages through a number of different sources. These include investment deposits, which come from either individual or corporate investors and their portfolios associated to mortgage lending, long term securities, which are derived from long term bonds to institutional investors and short-term securities, which provide a predetermined return on investment for access to short term funds.
2. Competitive Pressure
Banks and lending institutions like any business are subject to the same competitive pressures that any business needs to consider. In 2019, First home buyers and investors are savvier and have access to a wealth of information via the internet. The ability for them to quickly and accurately compare the market is easier than ever before. This means, that banks are especially focussed on being competitive with their rates, packages and options.
However, due to the complex nature of the mortgage market, banks are now starting to market features of their products, in line with competitive interest rates in an attempt to gain attention and secure more business. If you need help understanding the different aspects of mortgage products, reach out to one of our home loan experts to discuss.
3. Government Influence and RBA Cash Rates
The RBA, or Reserve Bank of Australia is the head body that determines the current cash rate for Australia. This rate has wide-reaching impacts, and heavily influences the banks go-to market rate for the mortgage and loan products. In recent years, there has been an increased level of scrutiny for banks to align their products and offerings with the fluctuations of the cash rate. This means, that anyone wanting to take out a new loan, whether as a first home buyer or as an investor, should pay close attention to the current cash rate, speculation as to its movement and the timing of announcements of changes to that rate. Generally speaking, any changes to this rate will happen quarterly so it could pay to speak to a mortgage consultant, who has a close eye on economic trends to see what direction they believe the market is heading in.
Other things to consider.
Recent Changes to Lending Standards
Since the Global Financial Crisis, and more recently with the inquiries into Australian banks policies, procedures and products we are seeing an increased level of scrutiny when it comes to determining rates for mortgage and general lending products. This additional level of due diligence has increased the administration and effort that a bank is obliged to go through in order to determine its interest rates, as well as assess individual loan applications.
This obviously has a flow-on effect for consumers as the additional time and effort required on the bank’s end leads to increased costs, which are then passed on to consumers in the form of higher interest rates.
Whilst in the long term this is a good thing, as banks are trying to avoid a repeat of mistakes made previously, the additional administration and complexity in home loan products means that the help of a mortgage consultant could mean the difference between getting the best deal for your new home loan, or getting stuck in a deal that seems good at face value but has a number of hidden fees and costs.
How to be certain you are getting the best deal?
Talk to a professional. Whilst the nature of home loans is becoming increasingly complex and the number of products and providers continues to grow, you can be sure that you are making the best decision by recruiting the help of a professional, experienced and knowledgeable mortgage and home loan consultant.
We have helped thousands of Australian families choose the right product for their needs, by carefully evaluating the markets current offerings, stripping back the complexity of home loan terms and conditions and helping them understand the true costs and values of their different options.
If you are looking to buy your first home, wanting to assess options for your current loan, or moving into investing, we are here to help you choose the best options to suit your needs.
