The Subtle Impact of Decimal Points on Your Home Loan: Unveiling the Hidden Costs
It’s easy to overlook, but that minuscule decimal point in your interest rate can have a significant impact on your repayments. Even a slight difference, like 50 or 25 basis points, can make a substantial financial difference.
Hold on tight, because the major banks aren’t anticipating a rate cut until next year. Despite the Reserve Bank of Australia (RBA) keeping the national cash rate steady at 4.10 percent for the third consecutive meeting, home buyers need to be savvy in seeking the best deals.
Banks are making adjustments outside of the RBA hiking cycle, and these incremental changes in interest rates translate into tangible dollar values, especially in the midst of our cost-of-living crisis. The big four banks boast an average headline rate of 7.21 percent.
Mozo, a financial comparison firm, highlights the impact of even a 0.5 percent difference in the rate on a $600,000 home loan based on the average variable rate of 6.60 percent. It can accumulate to an extra $57,064 in interest over a 25-year term. A mere 10 basis point shift, to 6.70 percent, results in an additional $11,319 in interest over the loan’s duration. Every basis point matters, so choose wisely.
A 0.5 percent difference in home loans could cost you $57,064 more over the life of the loan.
Even a seemingly minor 0.1 percent difference equates to a considerable $11,319 in interest payments. A 0.05 percent difference still translates into thousands, at $5,378 in extra interest on your home loan.
Understanding the Math Behind Repayments
Interest on your home loan is calculated daily and charged at the end of the month. Your lender deducts the outstanding loan amount daily. For instance, with an outstanding loan amount of $600,000 and an interest rate of 6.0 percent, your daily interest repayment would be $98.63. Multiplying this daily charge by the number of days in the month results in a monthly charge of $2,958.90.
Every Point Counts
While low interest rates may be tempting, the reality is that every basis point counts when considering the true cost of a home loan. Mozo’s Peter Marshall emphasizes that a seemingly small difference in interest rates can end up costing tens of thousands of dollars in the long run. Whether you’re contemplating switching lenders, investing in property, or buying your first home, it pays to do the math.
Mozo’s database reveals a mere 5 basis-point difference when comparing the two lowest home loan rates. However, in dollar terms, using the same loan as above, that’s a difference of $5,378 in interest paid over the loan term.