We’ve heard a lot of talk going on about interest rates lately and you may be wondering, what does all this talk mean? In this blog, we will go through what an interest rate is, how you can calculate it and more!
What is an Interest Rate?
To put it simply, interest rates are the amount of interest that is charged for borrowing money. Interest rates are usually expressed as a percentage and the higher the interest rate, the more expensive it becomes to borrow money. For example, if you borrow $100 from a bank with an interest rate of 5%, you will have to pay back $105 in one year. This is because 5% of $100 is $5, which would be your total cost of borrowing money for one year. Interest rates can be expressed as either nominal or real rates.
How to Calculate Interest Rates?
Interest rates are expressed as a percentage of the amount borrowed and are calculated by dividing the annual interest rate by the number of periods in a year. Now, this part does get tricky if you are trying to do it yourself on paper, luckily there are multiple free calculators on the internet that can calculate it for you! If you are looking at getting a mortgage and want to know what you’ll be repaying, these are the calculators to use. It is always best to also calculate what your repayments would be if the interest rate was to go up to, just say, an extra 5% or so to make sure you can afford the extra repayments if it does go up.
What are the Different Types of Interest Rates?
There are a few different interest rates out there and depending on what you are borrowing money for will usually depend on what type of interest rate you’ll get/go for. Interest rates can be fixed or variable and either short-term or long-term. When buying a house, you’ll more than likely be looking at long-term interest rates and you can choose between a fixed rate or a variable rate which both have their benefits and disadvantages.
Fixed-rate
The main reason people tend to choose a fixed rate is so they know exactly how much they will need to pay back each week/fortnight/month as it won’t change. It also gives that peace of mind if interest rates were rising as the fixed rate would still stay the same until your term is up. When choosing a fixed rate, lenders usually give you a choice in how long you would like to keep it. However, the longer the term is, the higher the interest rate will be that gets offered. Something to also keep in mind is the fact that you don’t usually have access to the extra features that some lenders offer like being able to redraw and making extra repayments on your loan. Another thing to keep in mind is if interest rates do drop, your interest rate will stay the same.
Variable-rate
The main reason people tend to choose a variable rate is for the added benefits of being able to redraw, offset accounts and making extra repayments to pay down your loan sooner. It is also easier to refinance your mortgage or switch to another loan with a better interest rate in future without needing to pay high fees for switching. When choosing a variable rate, it often tends to be lower than a fixed rate which makes people more inclined to choose it but it also has its disadvantages. If interest rates are going up, so will your repayments and the main issue is, that no one knows when the interest rates will stop going up. This can make it harder to budget and can often lead to financial stress depending on your financial situation.
I hope this blog helped you understand more about interest rates. If you are in need of any assistance or ready to buy a home, feel free to contact us here at SRS properties.
