Frequently Asked Questions – Rates/Accounts
What is the lowest interest rate available?
This is a very difficult question to answer as it depends on the lender’s promotions and your specific situation. It will vary frequently, and may even change from day to day. However, it should be noted: sometimes the loan product with the lowest interest rate may not be the most suitable loan for your situation.
What is a fixed rate?
Home and investment loan interest rates are divided into 2 types:
- Variable rates
A ‘variable interest rate’ is an interest rate can be changed or varied (i.e. increased or decreased) at any time over the life of the loan. Usually, changes to the interest rate are affected / initiated by RBA cash rate changes. However, banks can also make changes to the interest rate at their discretion, as has recently occurred. Variable interest rates will provide you with more flexibility, however also present a higher risk of interest rate fluctuations. - Fixed rates
A ‘fixed interest rate’ is an interest rate that is set (or fixed) for a specific period of time during the lifetime of the loan. Fixed interest rate periods that are usually available are between 1 and 10 years. The fixed interest rate will differ based on the length of the fixed period. For example, if a 2 year fixed rate product is chosen, the interest rate for the loan will be secured/fixed for 24 months and will then revert to a variable interest rate on the 25th month. Fixed interest rates will provide you with more stability from a repayment point of view, however it limits your flexibility.
- Variable rates
What is an offset account and how does it work?
An offset account is usually a fully functional transaction account that can be linked to your loan account. Most offset accounts are a 100% offset account, meaning that every $1 in the offset account offsets/counters the interest charge for $1 in the loan account. When you have an offset account, interest charges are calculated on the loan balance (the difference between the loan & offset accounts).
Offset accounts are best explained using an of example. For the purpose of the scenario below, assume that:
- Your loan account has a $400,000 balance (i.e. owing the bank $400,000)
- The loan is currently at an interest rate of 5%
- You have $120,000 in a savings account
Without an offset account
This will mean that you will be paying the bank interest charges of about $1,667 per month on the loan while earning an interest income of about $374 per month.$400,000 x 5% = $20,000 /year in interest charges ($1,667 /month)
$120,000 x 3.75% = $4,500 /year in interest income ($375 /month)
Net cash flow = – $1,292 per monthWith an offset account
Every $1 in the offset account is earning interest at the same rate as the loan account, effectively offsetting the interest charges on the loan.
For example, assuming that the $120,000 savings are now in the offset account instead of a savings account, your net cash flow will be – $1,167 per month.($400,000 – $120,000) x 5% = $14,000 /year in interest charges ($1,167 /month)
Net cash flow = – $1,167 per month (savings of about $125 per month)
If a couple purchase a property in 1 person’s name, can both incomes be used to qualify the loan?
Yes – however the relationship of the persons purchasing the property is vital in determining whether you can use both incomes to qualify for the loan. If it is a husband and wife or a defacto relationship, we will be able to use both incomes to qualify for a loan. This is an exception to the bank/lenders’ standard practice.
This is due to the lender/bank requiring any income that they have used in qualifying the loan to come from applicants only. The exception is given to husband & wife or defacto relationships, in accordance with family law.
Therefore, if the 2 people are not in a married or defacto relationship, we will not be able to use both incomes to qualify for the loan (if the purchase is only in 1 person’s name).
