Here at The Mortgage Calculator, we’re often contacted regarding the way that interest rates work. These confusing little fees are responsible for baffling plenty of first time applicants – and even repeat mortgage borrowers find themselves struggling to get to grips with how they work and how best to stay on top of them.
The simplest way to describe rates is by saying that they are recurring fees which banks apply to the payments that their customers make to them every month (or week, depending on the repayment schedule). If you borrow $100,000 a bank will want to make it worth their time, so they’ll add a little interest onto each instalment just to ensure that they see a return on their investment.
So, why is it so important to keep them as low as possible?
If you’re planning on borrowing a substantial amount from a bank, then the chances are that you’ll already be expecting to cover the costs of any interest that’s been applied to your home loan. What you might not know is that rates can be very different from bank to bank. So, how much money could you save by finding a cheaper rate exactly? Are we talking thousands, or just a handful of cash?
Well if you consider the below example, it might put things into perspective for you – and we’re sure that you’ll see why so many people consider hiring mortgage brokers to help them to keep their costs as low as possible. By comparing rates of interest, you could sign up to a much more affordable deal; one that could save you plenty of cash. Here’s how:
Let’s imagine that you wanted to borrow $200,000 from a bank at a rate of 4%. Although the rates will likely change as is the case with variable interest, we’ll settle at 4% for this example. If you wanted to pay back the $200k over the course of 30 years, then you’ll have to split that sum into 30 years’ worth of monthly payments, or 360 individual charges.
That’s $200,000 divided by 360, amounting to about $556 a month. Now let’s apply the 4% interest to make the total monthly repayment $578 a month.
Now, let’s imagine that your interest rate is 3% instead. The same calculations as the above would apply, although this time you’d be adding less interest to your monthly repayments (totalling $572). We know what you’re thinking… that’s hardly a huge amount to save. But now multiply the saving of $4 by 360 payments, giving $1,440, and you’ll have the total sum that you will be saving by finding a cheaper interest rate!
Attractive concept, right?