Guides & Tools

What Is an Interest Rate?

An interest rate is the cost of borrowing money from a lender. It is expressed as a percentage of your loan amount.

Even small differences in interest rates can significantly affect your total repayments.

How Interest Rates Work

When you take a home loan:

• You borrow money (principal)
• You pay interest on remaining balance
• Your repayments include both interest and principal

Over time, interest reduces as your loan balance decreases.

What Impacts Interest Rates?

1. Reserve Bank of Australia (RBA)

The RBA cash rate influences lender rates.

2. Lender Policies

Each bank sets its own margins.

3. Loan Type

Fixed, variable, and split loans all differ.

4. Borrower Profile

Credit score and deposit size affect rates.

Fixed vs Variable Interest Rates

Fixed Rate Loans

Locked interest rate

Predictable repayments

Protection from rate rises

Variable Rate Loans

Can change over time

May increase or decrease

More flexible features

How Rate Changes Affect Repayments

Even a 0.5% increase can:

• Add thousands in extra repayments
• Reduce borrowing capacity
• Increase long-term loan cost

Tips to Get a Better Rate

Improve credit score

Increase deposit size

Compare lenders

Use a mortgage broker like Believe Finance

Conclusion

Understanding interest rates helps you choose the right loan and save significantly over time.