How Home Loan Interest Rate is Determined
This article will help you to understand how home loan interest rate is calculated, so you can make better decision around, which lender to partner with for your mortgage. Furthermore, it will empower you to explore the different options and determinants, when it comes to the interest rates being offered by different banks and lending institutions.
The interest rate on mortgage packages that are offered by banks/ lenders are influenced by many different factors including:
Cost of Funds
This refers to the cost that a bank incurs, when sourcing wholesale money to provide mortgage facility for their customers. Australian banks usually fund their mortgages through a number of different sources;
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.
Short-term securities, which provide a predetermined return on investment for access to short term funds.
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, they used internet to access to a wealth of information to compare interest rate between lenders. This increased consumer's ability to identify & compare the available product's interest rate in the market easier than ever before. That’s why banks are especially focussed to provide competitive options with their product rates & packages.
However, due to the complex nature of the mortgage market, banks are now changing the features of their products, in line with market’s 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 Easy2Mortgage home loan experts to discuss. How Home Loan Interest Rates Are Determined
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. Recently, Royal Commission has increased the level of scrutiny for banks to align their products and offerings with the fluctuations of the cash rate.
Other things to consider...
Recent Changes to Lending Standards
Since the Global Financial Crisis, more recently with the Royal Commission into Australian bank’s policies, procedures and products we are seeing an increased level of scrutiny in Loan Application put to the lenders. This additional level of due diligence has also increased the administration and effort that a bank is obliged to go through in order to determine its interest rates & assessment of individual loan applications.
This obviously has a flow-on effect for consumers as the additional time and effort required on the lenders 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 right 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 increase the chances of getting your suitable 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’d increase your chances by recruiting an experienced and knowledgeable mortgage & home loan consultant to find you the product that is just right for your financial situation.
Here at Easy2Mortgage, we help Australian families on the daily bases to 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 or next home, trying to assess your options for current loan, or purchasing an investment property, Easy2Mortgage is here to help you choose the right option to suit your needs.
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