When most people think of 'Mortgage Rates', they think solely about the interest rate applied to their loan, which is logical as this is what will ultimately determine the repayment amount. However, there are so many different types of rates that are involved in the world of Mortgage Lending that we thought we'd break them down and do our best to explain what they are and how they impact you.
The Assessment Rate is the rate of interest that the lender will use to 'assess' your loan application. This rate is currently mandated in Australia to no less than 7% and at the time of writing this post, the lowest assessment rate we can find is 7.10% and the highest 8.49%.
While not advertised or publically available, the assessment rate is actually of significant importance as it has a big impact on your over borrowing capacity. Most people would think if the bank is charging them a rate of say 4.29% per annum, then that is the rate being used to assess their ability to repay the loan, but this is not the case. In fact, your being approved for a loan with a built-in buffer well above what you will actually pay.
Standard Variable Rate
The Standard Variable Rate (SVR) is a rate set by the individual banks/lenders that represents their 'standard' rate for a variable interest rate loan. In the real world, almost no customer will, nor should pay the Standard Variable Rate as all banks have several ways of obtaining discounts below this rate.
Each time the Reserve Bank of Australia announces a change to the official cash rate, banks and mortgage lenders will eventually move their Standard Variable Rates as well, but not always by the same amounts. This leads to what we call a bit of interest rate 'musical chairs' as the lenders seem to take turns from being slightly more expensive, to having the 'cheapest' SVR. We suggest paying little attention to the Standard Variable Rate when in comes to mortgage lender comparisons.
Discounted Variable Rate
The Discounted Variable Rate is ultimately the rate that is applied to your loan and helps determine what your repayment will be, along with the amount and term of the loan.
Lenders discount their Standard Variable Rate is many different ways and will often vary the discounts to either increase the flow of business they receive, or decrease the flow of business.
A quick guide to how discounts to the SVR are often applied is below
- Loan Size - The more you borrow the greater discount you can expect to receive
- Loan to Value Ratio - The lower the Loan to Value Ratio (LVR) the great the discount you can expect to receive
- Loan Purpose - Owner Occupied loans will often be given a greater discount than Investment Loans
- Repayment Type - Principle & Interest loans will in most cases receive a larger discount than loans on Interest Only repayments
The size of the discount can vary heavily and as a rough guide is going to be between 0.50% and 1.50% below the Standard Variable Rate set by each lender.
A Fixed Interest rate is one that is set over a particular term that most commonly ranges from 1-5 years, but can include terms as long as up to 10 years in Australia. Fixed Rates provide certainty of repayment during their term but often carry certain restrictions that can (but not always) include the lack of an offset account feature, restrictions to making additional repayments, lack of a redraw facility and come with break costs if the loan is paid out before the maternity date.
A Comparison Rate, also referred to as a 'True Rate', is an attempt by regulators to assist consumers compare loans effectively. The Comparison Rate is calculated by taking into account not only the interest rate charged on the amount borrowed, but also the fee's charged on that loan. This is because a variation in fees charged by a mortgage lender could make a loan with a seemingly low rate of interest actually cost more than a loan with higher interest but little to no fees.
The area of concern we have though is that Comparison Rates only need to use a loan amount of $150,000 over a 25 loan term. While this may be fine for some, the overwhelming majority of our clients borrow much more than $150,000 and often over the maximum allowable term of 30 years. Increasing the amount borrowed and the term has a noticeable impact on the comparison rate.
Luckily, we have a calculator that you can use to calculate the Comparison Rate on any loan amount or term, thus allowing you to conduct accurate loan comparison researched based on your personal circumstances. This calculator is available via our Calculators page or just click here!