Interest rate cuts affect all Australians in one way or another.

The past year has been an exciting time for new and recent home buyers, with multiple interest rate cuts stealing the spotlight in mortgage and real estate headlines.

With each RBA interest rate cut, home owners scramble to search what is the interest rate on mortgages through their lender, hoping the cuts will be passed down. But just how important are those tiny percentage point changes? And what do they mean for the average Australian mortgage?

What is a mortgage interest rate?

The interest you pay on your home loan can be calculated in a number of different ways. The most popular loans in Australia are either fixed interest or variable interest rate home loans.

The current variable home loans may be the most flexible options and often lower in fees. They also offer the chance for interest to drop lower than your current rate when official Reserve Bank rates are cut. Fixed-interest rates are usually set slightly higher than the variable, but offer peace of mind against interest rate hikes.

Why do interest rates change?

Interest rates are used to control the economy because they are an incredibly fast way to implement economic change. The board of the Reserve Bank meets on the first Tuesday of every month and makes a call as to whether they should increase, decrease or leave interest rates alone.

A number of factors contribute towards their decision to make interest rate changes including unemployment rates, inflation and more. The official RBA rate is offered to the banks to supply consumers with money loans, then the gap between this rate and your loan interest rate is the bank’s profit and how they stay in business.

Tips for switching home loans – it can be done

Exit fees on new home loans are now a thing of the past thanks to new laws encouraging less loyalty to uncompetitive lenders. Mortgage repayments are the biggest monthly household expense for most Australians.

Getting a reduction of just $200 a month will save you close to $50,000 over a 20-year loan. Use this loan repayment calculator to work out how much you could save on your loan with an interest rate drop.

e.g. of a low rate fixed mortgage* — click to find out more:

e.g. of a low rate variable mortgage* — click to find out more:

*rates are accurate as at date of publication (17th May 2013)

Moneyhound’s home loan comparison tool offers an easy way to help find and compare home loans with fixed interest rates, variable rates and split loans as well as interest-only and low-doc loan offers.

How much can be saved by reducing your interest rate?

Interest rate cuts affect you immediately and have a huge impact over the life of a loan. A mere 0.25 per cent interest rate cut saves you about $60 a month on the average monthly Australian mortgage repayment. Saving a full 1.0 per cent gives you back $60 each week.

Say you took that $60 and put it towards your mortgage as extra repayments. A $300,000 loan over 30 years would be paid off 8 years earlier, saving you more than $123,000 according to Moneyhound’s extra repayments calculator.

With rates down so low today, it makes sense to see how your mortgage compares.

How to find the lowest variable home loan rates currently on the market

Try comparing the best variable rates of home loans on the market here. then sort the results by the amount to pay over the life of your loan. You may find the loans with the lowest rates don’t always come out on top if they charge monthly service fees.

Weighing up the options of low fees, variable rates, fixed interest and bundle options can be a small homework task today that pays big rewards in the future.

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