27 Nov 2011

How Do Interest Rates Affect Your Mortgage

With world economies these days in seemingly constant crisis, a lot of people are taking their money out of the stock market and investing in their home and property instead. This can be a great way to save money for your kids’ future as property values are way more stable than stocks which tend to fluctuate. Investing in your home can often mean that you will need to take out a mortgage and with your mortgage comes the impact of interest rates. Whether you are looking at buying real estate on the Sunshine Coast or a home in the suburbs of Sydney, you will need to know how interest rates work. The following shows how interest rates can and will affect your mortgage; and are therefore important things to think about before signing off on anything at the bank.

Fixed or Set

You are probably going to need to get some type of mortgage to get that perfect piece of Noosa real estate, though whether you go for a fixed interest rate or a variable one could be the difference between paying it off in 10 years or 30. The advantage of a fixed rate is that you will know exactly how much you will need to pay each month for the life of the loan. The disadvantage of a fixed interest rate is that if lending interest rates drop, you will still be stuck with the higher rate. The gamble of the variable rate is, of course, that it can vary in both directions and possibly have you paying way more as the rate goes up and up. It’s important to get some advice before you make your choice.

Inflation

Interest rates are affected by inflation and therefore so is your mortgage. When inflation rises, the cost of everything goes up – including your interest rates – meaning you will be paying back more for the money you’ve borrowed. Even just a slight rise in interest rates can mean thousands of dollars more in annual repayments. Over the last few decades inflation has been tamed to a large extent, minimising the need for higher interest rates, though rates always seem to go up quicker than they come down.

The Type of Mortgage

Sometimes you will be able to get a better interest rate on your mortgage if you choose to borrow a larger amount of money. You are going to need to do some careful calculations though it can sometimes be worth borrowing that little bit extra in order to get a better rate. You can even put that extra money aside just for mortgage repayments and get a good start on paying it off. How long you choose to take to pay off your mortgage is also a big factor as it will help determine how much of an impact interest rates will have on your mortgage.

In short, the rate of interest is going to affect your mortgage in a very real way, being the deciding factor in determining how much money you are going to need to repay. Be mindful of interest rates, and when deciding on a mortgage be sure to get some professional financial advice.

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