We often hear “mortgages” and “interest rates” bandied about a lot here in Australia. If you are a homeowner or you are considering buying a property, these terms will have a significant impact in your life, especially in your finances. It is important that you take time to understand them so you can make proper financial decisions.
Interest is the amount lenders charge for the money (principal) you borrow. Interest rates are the percentages used to calculate the amount of interest payable based on a percentage of the money (principal) you borrow.
The principal refers to the amount of money that you borrow. As you make repayments on your loan, the principal decreases as does the amount of interest payable on that principal. Remember when we said that the interest rate is like rent on money? Thus, you only pay “rent” on the money that you still owe and not on that which you have already returned.
Not all home loans with cheap interest rates are cheap. A home loan offered at a lower rate does not necessarily mean it is better than a home loan with a higher rate. Why? It’s because the true cost of the loan is only revealed when you add up all the fees and charges associated with the loan. The home loan with a lower rate can turn out to be costlier so you need to be wary of it. A great tool that can help you identify the true cost of the loan is the comparison rate. It is a combined rate of interest rate, fees, and other charges added to the loan. With the comparison rate, you are not only comparing the interest rates of the loan so it does help you make a good judgment in determining which is the better loan for you.