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How the rate hike will affect your bond payment

By unknown | Jun 11, 2007 | COMMENTS [ 0 ]

Robert Laing

Robert Laing

Now that the banks have increased their interest rates on home loans by 0,5percent, many households are wondering how much more they will be paying on their bond.

Thanks to the Internet, calculating bond repayments is very easy. Search for "mortgage calculator" online, and you'll get several websites that do the maths for you. They will ask you to fill in three variables: the amount you want to borrow, the number of years over which you plan to repay it and the current interest rate.

The key lesson from playing around with rate calculators is you can save a fortune by putting more into your bond every month than the minimum required. Savings product floggers like to talk about the "miracle of compound interest". But financial institutions charge higher interest to borrowers than they pay to savers. It's far better to pay debt off faster than to split your money between saving and getting out of debt.

Interest rate increases are good news for the lucky few who have savings instead debt. Make paying off debt your first priority.

A thing loan calculators can't teach you is how to get a better interest rate. The example assumes the current prime interest rate, whereas banks typically charge that plus a few "basis points". Basis point are banking jargon for percentage points times a 100. Thursday's 50 basis point rise is equivalent to 0,5percent.

The interest rate your home loan provider is willing to offer depends on the "loan to value". If you have enough saved to pay for 20percent of your home and only need to borrow the balance, you'll be able to negotiate a far better interest rate.


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