Being a homeowner signifies financial security because you don’t have to worry about too many living expenses. However, it’s also a responsibility because a house is a considerable investment. Because of this, people turn to banks and other financial institutions to borrow a home loan, which allows them to buy a house.
Home loans are categorised into two distinct categories: fixed-rate and variable. Fixed-rate loans are loans with a set term and interest, but variable home loans are loans subject to market rates and, therefore, may change. In Australia, the change for variable home loans is typically minimal, but they can become expensive over time. Because of this, one must know the possible reasons why variable home loan rates change. These include:
The Reserve Bank of Australia (RBA) controls the country’s monetary policy. In addition, it establishes the official cash rate (OCR), which is the interest rate charged on overnight loans. The OCR is the rate at which the RBA lends to the banks, which means the RBA can decide to alter the OCR whenever it feels fit, consequently affecting the variable home loan rates.
Significant changes in the OCR don’t occur often and are usually done in conjunction with scheduled policy meetings. Depending on where the OCR goes, the bank may increase or decrease its interest rates, ultimately changing the variable home loan rates.
Let’s say the RBA decides to lower its OCR, which means existing fixed-rate home loans also drop. Every financial institution follows the RBA’s decision to decrease its interest rates. As a result, the existing variable home loans will also be altered to accommodate the new RBA decision.
Banks are in the business of selling credit and mortgages, but most of the time, banks aren’t willing to take the risk of lending money to clients who don’t appear qualified to pay it back. Banks assess their clients’ financial capacity using credit scores to counter this.
If a client’s credit score doesn’t measure up to their financial capacity, their bank will charge them a higher interest rate. However, a higher interest rate can be avoided by increasing savings, paying off other debts, and increasing your income. You can qualify for a lower interest rate if you increase your revenue without increasing your living expenses.
If you take advantage of tax deductions and finance offers to increase your income, you can improve your savings and make your income appear bigger to potential lenders. So before applying with a bank, be sure you know your credit score.
Mortgage lending is a risky business, and banks need to ensure that if a client defaults, they have enough capital to cover the money that isn’t paid due to the loan. To mitigate this risk, banks set up a margin over the money they lend to cover costs.
As the variable home loan rate increases, so do the margins. Banks will most likely raise the margin as the variable home loan rate increases. However, there is always a cap regarding how large the margin can be.
Additionally, banks consider the borrower’s credit history, current assets and liabilities, and overall financial situation. If they don’t have the capital to cover their expenses if the loan defaults, they won’t lend you the money.
Banks are required to follow laws and regulations which are intended to protect clients from unfair practices. Banks aren’t the only ones who must follow the rules; regulatory agencies also do so.
To make sure banks follow the rules, regulatory agencies issue regulations. As a result, banks are forced to follow these rules, which means they can’t charge variable home loan rates above a specific limit. Therefore, banks have to change their variable home loan rates accordingly.
Variable home loan rates are affected by many variables, which can change the rate at any given time. If you’re interested in getting a variable home loan, brief research on why the rate differs is necessary. Of course, you also need to consider your financial situation to make an informed decision.
If you’re looking for loan guarantors in Australia, Shore Financial can help you! We assist prospective borrowers with any loan to ensure they will be one step closer to their dream home. Reach out today and allow us to help you!
We appreciate your message and a Shore Financial Adviser will respond to you within a few short days. In the meantime, here’s a few links to keep you occupied.
We appreciate your message and a Shore Financial broker will respond to you within a few short days. In the meantime, here’s a few links to keep you occupied.
