The home loan interest rate represents the factor that makes the difference between various loan categories. This element alone influences the monthly costs in the repayment schedule, which means that the tiniest rise in the interest rate will take more money out of your bank account. The home loan interest rate can be variable, fixed or combined. Some lenders even choose to stimulate contracts by granting low-rates for a determined period at the beginning of the contract.
The variable home loan interest rate poses no restrictions in case of additional payments, and this is probably the biggest advantage it provides. Plus, the interest rate will drop together with the cash rate. Unfortunately, when it comes to interest rate increases, there can be no prediction or relation with the variation of the interest rate. The more rewarding situation from this perspective is the fixed interest rate, which remains locked at the same level for up to five years. You thus have the chance to better plan your finances because you know exactly what you are going to pay every month.
With a fixed home loan interest rate, you cannot take advantage of the rate decrease, plus, there may be restrictions in case you want to make a repayment in advance. The introductory home loan interest rate is very advantageous for the first one or two years of the repayment schedule, but then it gets much higher. Unfortunately there are high termination fees and high monthly rates when the introductory period ends.
Mention must be made that any comparison between loan offers is difficult or almost impossible given the difference in the home loan interest rate and the existence or absence of additional fees. Therefore, lenders must provide a ‘comparison rate’ which represents the interest rate together with all the fees and charges. For example, due to the supplementary charges, a home loan with an interest rate of 8.0% percent can have the comparison rate of 8.5%. For a more complex understanding of the loan offer, do consider the rest of the features, besides the home loan interest rate.
Do not neglect to carefully check the termination fees, because they can give you a very nasty surprise. A cheap loan will no longer be cheap if you have to pay a huge sum of money just to terminate it sooner. 2% for early termination represents a lot of money if you want to be rid of the loan repayment sooner.
