Understanding Interest Rates

November 2, 2016 - Posted in Home Loans, Investment Loans

Interest rates are far from straightforward. There are different types of interest rates that can sometimes confuse the everyday consumer.

The difference between interest rates is based on a few key factors. This is an important concept to understand whether you are buying a new car or an investment property. Today we’re going to break this subject down and help you understand exactly how interest rates work.

Interest: What Is It?

Interest is the cost of borrowing money and it is usually expressed as a percentage of the full loan amount. When paying back your loan, you will need to repay the original amount (the principal) and the cost of borrowing that money (the interest). How much you pay in interest depends on the loan type and amount borrowed.

For instance, if you borrow $100 at an annual rate of 5%, after a year you will owe $105. Most rates are calculated more frequently. An annual rate of 5% may be calculated monthly. This is great if you’re investing money but it can add up exponentially, especially with a high-interest credit card.

Read below to find out about the different interest rate types:

Fixed Rate Interest

As the name suggests, a fixed rate interest is when a certain amount of the loan is paid during its duration. For example, if the loan amount was $1000 with an interest of 5% per annum (12-month duration), the total borrowed would be $1050.

These kinds of loans make it easier to calculate the exact amount the borrower will have to pay back every month as the amount stays the same throughout. Again, if the amount is calculated daily, weekly or monthly, the interest accrued will be slightly higher.

Variable Rate Interest

A variable rate interest loan allows the investor or lender to adjust the interest rate according to the demands of the market. The advantage in this kind of loan is that you’ll benefit if there is a drop in the market rate. If the interest rate was 5% and drops to 4%, you’ll pay less interest than you initially signed up for. However, if rates increase then that will also be reflected in your monthly repayment amount. Most home loans taken out on the Gold Coast are on a variable interest rate. It’s difficult to predict market conditions as the property market on the Gold Coast tends to fluctuate.

If you are considering a variable rate interest rate loan, take some time to fully understand the benefits and shortcomings.

Annual Percentage Rate

An annual percentage rate or APR is a portion of the interest which is payable on the loan based on a 12 month period. In many countries, investors or lenders must disclose the APR so consumers can compare lenders against a common feature.

The APR allows potential borrowers to decide what the real cost of the total loan will be. Keep in mind, there may be additional costs for set up or administration tasks that may not be included in the initial calculation. These extra costs can adversely impact those opting for small loans that need to be repaid quickly.

Making Interest Easy

It can be tricky to get your head around interest. To talk to an expert mortgage broker in Brisbane, get in touch with Multi Choice Home Loans. Established in 1998, we are a pioneer in the arrangement of home and investment loans for Queenslanders. We offer customised service to clients anywhere in Australia. Our head office is located in Brisbane, with branches on the Sunshine Coast, and in Beenleigh and Hervey Bay.

Call us today on 1300 36 36 99 or use our online form to get in touch.