Unit 4: Lending Rates and Products Flashcards
What are 9 factors affecting interest rates charged by lenders to borrowers?
- Term of the loan
- LVR (higher LVR = higher interest)
- Overall value of customer relationship
- Interest rates of competitors
- Admin costs
- Prior borrowing history
- Financial institution funding or borrowing costs
- Regulatory change
- Government taxes
When does the RBA decide whether to change the official cash rate?
First Tuesday of every month (except January)
What are 3 things that influence the RBA’s decision to raise, hold, or lower the cash rate?
- Amount of money circulating in the country.
- Domestic and international economic conditions.
- Overall stability of financial markets.
How much does the RBA generally change the cash rate by?
Commonly by 25 basis point (0.25%) or 50 basis point (0.50%) increments
How do RBA cash rate changes affect banks and other financial institutions?
RBA hands down interest rate decision, and individual banks/financial institutions decide whether to move their own interest rates in sync or in variation.
To assess the impact on the interest they charge on loans and pay on deposits, they consider:
- Funding costs
- Long-term outlook on interest rates.
- Competition.
- Risk and regulatory settings.
What kind of domestic and international economic conditions may affect RBA official cash rate decisions?
Employment and inflation figures, business and consumer confidence, household debt, currency.
What are 4 common interest rate options?
- Fixed
- Variable
- Hybrid (or Split)
- Introductory
Briefly explain fixed rate loans?
- Same interest rate paid over the agreed fixed period (typically 1-5 years).
- Safeguards against interest rate rises, but removes potential to take advantage of falling interest rates.
- May have restrictions on additional repayments.
- May have significant break fee for ending a fixed rate loan early.
Can a bank increase variable rates even if the cash rate does not increase?
Yes, they can
Are there generally restrictions on making additional repayments to variable loans?
No, and excess repayments may e withdrawn on some variable loans
What is a hybrid (aka split) loan?
Allows a borrower to pay a fixed rate on a portion of the loan and a variable rate on the rest.
What is an introductory (aka honeymoon) rate loan?
Loans that offer customers a discounted interest rate for a set period at the beginning of the loan (generally 12-24 months).
After the introductory period, it will revert to the standard variable rate offered by the lender, unless otherwise agreed.
What are 4 reasons a customer might select a variable rate loan?
- Opportunity to take advantage of interest rate reductions.
- Ability to make additional repayments without penalty.
- Opportunity to use a redraw facility to access funds.
- Ability to refinance without penalty.
Does the lowest interest rate always represent the best value?
No, because fees and charges can add thousands to the cost of a loan. It is important to look at the comparison rate.
Are all lenders legally required to display a comparison rate when advertising any loan?
Yes