The money you borrow from a lender has a price. Here’s what you need to know about it.

Applying for a loan can be a grim and time-consuming process. There are all sorts of things you need to take into account. What’s more, you have to make sure you’ll be able to service the loan comfortably.

Wealth for Life lenders
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To make this happen, you need to carefully research your loan’s interest rate. It’s by far the biggest loan-related expense, so you want to have all the facts before you make your final decision.

Familiarising yourself with how interest works can save you a lot of money. Just ask our clients Luciano and Melissa. Like many investors, they are seeking financial freedom.

To make this happen, they have to save up as much money as possible. This is why we helped them refinance their mortgage to a lower interest rate. Now they can save $7,500 on a yearly basis.

If you want the same thing, there are a few things you need to learn about mortgage interest. 

1. Lenders Tie Their Rates to the RBA’s Cash Rate

Have you ever wondered how lenders reach their interest rates? Is it just a number that makes them the most money while still attracting borrowers?

Wealth for Life The Cash Rate
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Not exactly.

To decide on the interest rate, lenders first take a look at the RBA’s cash rate.

The fact is that banks borrow money from one another on a regular basis. This ensures they have enough reserve to operate as they should. Of course, they also have to pay for the money they borrow.

The RBA decides how much they have to pay by setting the cash rate. It’s the minimal rate a  bank has to pay to borrow money. To make money, financial institutions add a certain percentage point to the cash rate when they offer loans to borrowers. 

2. But They Rarely Offer the Best Rate to Borrowers

While lenders take into account the cash rate when forming interest rates, they still look at their own needs first. This means they won’t necessarily offer you the best possible deal. For example, if the cash rate is 2%, there’s nothing to stop them from setting the interest rate at 5%.

Wealth for Life A Better Rate
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This is where research comes into play. You need to look for a lender that won’t overcharge you for taking out a loan. This can be a challenging process, but it can save you a lot of money in the long run.

The good news is that there are things you can do to pay less interest if you feel over-encumbered. These include:

  • Making extra repayments – A lender may offer you an option to pay more than your monthly repayments. While this might seem like more money out of your pocket, it can save a small fortune on interest rates. Whenever you have some extra cash, you can pay more to reduce the interest calculated. Over time, this can amount to a significant sum of money.
  • Use an offset account – An offset account is much like any other transaction account. The only difference is that you can use the balance to offset your mortgage principal. Naturally, this decreases your interest rate as well. The money in your offset account reduces the calculated interest, so you can save quite a bit of money this way.
  • Renegotiate the deal – Many people don’t know this, but you can ask your lender to give you a better loan structure with a lower interest fee. In many cases, all you have to do is to say you’re thinking about switching banks. To retain your business, they’ll likely consider renegotiating your loan terms. And if they don’t, you can always find a lender that offers a lower rate.

3. Loan Features May Affect Your Rate 

This is where things get a bit complex. There are all sorts of contract features you have to take into account when taking out a loan. Spending some time on research can go a long way towards saving you money on interest.

Wealth for Life loan features
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For example, a lender might offer you a rate that seems too good to be true. Watch out – what you don’t pay in interest you may have to pay in different fees or a poor repayment structure.

On the other hand, don’t disregard the loan just because the interest rate seems high. If the lender offers enough flexibility to lower the interest rate, a higher rate might not matter. Look back over section 2 of this article to see what to look for.

Remember that the devil is in the details. Don’t get drawn in by enticing offers without reading the fine print. If you need any help, it’s always a good idea to consult an advisor before you close the deal.

4. Your Credit Score Impacts Your Interest Rate 

When giving out loans, lenders need to know that you’ll be able to service it. This is why they always look at your credit score when considering you as a borrower. It shows your responsibility and ability to comfortably repay the loan.

There are a great number of things that can impact your credit score. These include your income, credit and loan accounts, and whether you have any defaults in the past. The lender will crunch the numbers and see if you’re a risky borrower.

If you are, you’ll likely get a higher interest rate. The lender would look at it as more protection from a potential default.

This is why you should never take out a loan when you absolutely need it. If you rush it, you might miss a chance to improve your credit score. There are ways to do this, and your advisor can help you fix your score.

Don’t underestimate the impact this can have on your loan. A good credit score gives you much more negotiating power and can save you a lot in interest repayments.

5. Fixed or Variable?

Interest rates can be variable or fixed. The proper choice would depend on your financial situation and goals. Both come with benefits and drawbacks, so you need to choose carefully.

A fixed rate is a much safer choice if you want stability. It doesn’t change with time no matter the current cash rate. This means you always know exactly how much you have to pay. You can easily plan for the future.

With a variable rate, you might be taking a higher risk. If the cash rate goes up, so will your interest rate. On the other hand, you can save money if it goes the other way. 

Many investors decide to fix the interest rate at the beginning of their mortgage. This gives them a certain degree of stability while still opening up potential savings. 

It’s actually even more complicated. For example, a fixed rate mortgage may come with a higher rate to start off with. And all variable rate mortgages begin with a fixed rate before switching to variable. 

Be Diligent

Before you take out a loan, you need to be certain you understand every single detail. Minor things can create a huge difference in the long run, and you don’t want the compound effect to crush you.

Make sure to do your homework and compare as many options as possible. This will give you an option to negotiate a deal that won’t put you in a hole.

Reach out to us and we’ll help you choose the perfect loan for your needs.

The money you borrow from a lender has a price. Here’s what you need to know about it.

Applying for a loan can be a grim and time-consuming process. There are all sorts of things you need to take into account. What’s more, you have to make sure you’ll be able to service the loan comfortably.

Wealth for Life lenders
  • Facebook
  • Twitter
  • Google+
  • Pinterest
  • Gmail
  • LinkedIn

To make this happen, you need to carefully research your loan’s interest rate. It’s by far the biggest loan-related expense, so you want to have all the facts before you make your final decision.

Familiarising yourself with how interest works can save you a lot of money. Just ask our clients Luciano and Melissa. Like many investors, they are seeking financial freedom.

To make this happen, they have to save up as much money as possible. This is why we helped them refinance their mortgage to a lower interest rate. Now they can save $7,500 on a yearly basis.

If you want the same thing, there are a few things you need to learn about mortgage interest. 

1. Lenders Tie Their Rates to the RBA’s Cash Rate

Have you ever wondered how lenders reach their interest rates? Is it just a number that makes them the most money while still attracting borrowers?

Wealth for Life The Cash Rate
  • Facebook
  • Twitter
  • Google+
  • Pinterest
  • Gmail
  • LinkedIn

Not exactly.

To decide on the interest rate, lenders first take a look at the RBA’s cash rate.

The fact is that banks borrow money from one another on a regular basis. This ensures they have enough reserve to operate as they should. Of course, they also have to pay for the money they borrow.

The RBA decides how much they have to pay by setting the cash rate. It’s the minimal rate a  bank has to pay to borrow money. To make money, financial institutions add a certain percentage point to the cash rate when they offer loans to borrowers. 

2. But They Rarely Offer the Best Rate to Borrowers

While lenders take into account the cash rate when forming interest rates, they still look at their own needs first. This means they won’t necessarily offer you the best possible deal. For example, if the cash rate is 2%, there’s nothing to stop them from setting the interest rate at 5%.

Wealth for Life A Better Rate
  • Facebook
  • Twitter
  • Google+
  • Pinterest
  • Gmail
  • LinkedIn

This is where research comes into play. You need to look for a lender that won’t overcharge you for taking out a loan. This can be a challenging process, but it can save you a lot of money in the long run.

The good news is that there are things you can do to pay less interest if you feel over-encumbered. These include:

  • Making extra repayments – A lender may offer you an option to pay more than your monthly repayments. While this might seem like more money out of your pocket, it can save a small fortune on interest rates. Whenever you have some extra cash, you can pay more to reduce the interest calculated. Over time, this can amount to a significant sum of money.
  • Use an offset account – An offset account is much like any other transaction account. The only difference is that you can use the balance to offset your mortgage principal. Naturally, this decreases your interest rate as well. The money in your offset account reduces the calculated interest, so you can save quite a bit of money this way.
  • Renegotiate the deal – Many people don’t know this, but you can ask your lender to give you a better loan structure with a lower interest fee. In many cases, all you have to do is to say you’re thinking about switching banks. To retain your business, they’ll likely consider renegotiating your loan terms. And if they don’t, you can always find a lender that offers a lower rate.

3. Loan Features May Affect Your Rate 

This is where things get a bit complex. There are all sorts of contract features you have to take into account when taking out a loan. Spending some time on research can go a long way towards saving you money on interest.

Wealth for Life loan features
  • Facebook
  • Twitter
  • Google+
  • Pinterest
  • Gmail
  • LinkedIn

For example, a lender might offer you a rate that seems too good to be true. Watch out – what you don’t pay in interest you may have to pay in different fees or a poor repayment structure.

On the other hand, don’t disregard the loan just because the interest rate seems high. If the lender offers enough flexibility to lower the interest rate, a higher rate might not matter. Look back over section 2 of this article to see what to look for.

Remember that the devil is in the details. Don’t get drawn in by enticing offers without reading the fine print. If you need any help, it’s always a good idea to consult an advisor before you close the deal.

4. Your Credit Score Impacts Your Interest Rate 

When giving out loans, lenders need to know that you’ll be able to service it. This is why they always look at your credit score when considering you as a borrower. It shows your responsibility and ability to comfortably repay the loan.

There are a great number of things that can impact your credit score. These include your income, credit and loan accounts, and whether you have any defaults in the past. The lender will crunch the numbers and see if you’re a risky borrower.

If you are, you’ll likely get a higher interest rate. The lender would look at it as more protection from a potential default.

This is why you should never take out a loan when you absolutely need it. If you rush it, you might miss a chance to improve your credit score. There are ways to do this, and your advisor can help you fix your score.

Don’t underestimate the impact this can have on your loan. A good credit score gives you much more negotiating power and can save you a lot in interest repayments.

5. Fixed or Variable?

Interest rates can be variable or fixed. The proper choice would depend on your financial situation and goals. Both come with benefits and drawbacks, so you need to choose carefully.

A fixed rate is a much safer choice if you want stability. It doesn’t change with time no matter the current cash rate. This means you always know exactly how much you have to pay. You can easily plan for the future.

With a variable rate, you might be taking a higher risk. If the cash rate goes up, so will your interest rate. On the other hand, you can save money if it goes the other way. 

Many investors decide to fix the interest rate at the beginning of their mortgage. This gives them a certain degree of stability while still opening up potential savings. 

It’s actually even more complicated. For example, a fixed rate mortgage may come with a higher rate to start off with. And all variable rate mortgages begin with a fixed rate before switching to variable. 

Be Diligent

Before you take out a loan, you need to be certain you understand every single detail. Minor things can create a huge difference in the long run, and you don’t want the compound effect to crush you.

Make sure to do your homework and compare as many options as possible. This will give you an option to negotiate a deal that won’t put you in a hole.

Reach out to us and we’ll help you choose the perfect loan for your needs.

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