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No, and excess repayments may e withdrawn on some variable loans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
What 5 things go into determining a loans comparison rates?
- Amount of loan
- Length of loan
- Repayment frequency
- Interest rate
- Fees and charges connected with the loan
Does the comparison rate include extra fees and charges applied only in certain circumstances (like government costs or where the customer pays out the loan early)?
No, it uses the standard loan costs like the interest rate and most applicable fees and charges
What is the comparison rate designed to do?
Inform consumers of the true cost of a specific loan (credit product) and make it easier for consumers to compare the different loan (credit products) available on the market.
The comparison rate makes a comparison based on cost. Does it also include other factors that may make a loan more attractive?
No, the comparison rate only makes a comparison based on cost.
It does not include other factors that may make a loan attractive, like access to fee-free accounts or flexible repayment options.
What is Lender’s Mortgage Insurance (LMI)?
Insurance that helps customers achieve home ownership without a 20% deposit.
Why use Lender’s Mortgage Insurance (LMI)?
Lenders ma allow customers to borrow up to 95% of the property valuation for owner-occupied properties.
Who does Lender’s Mortgage Insurance (LMI) insure and how?
The lender - not the borrower or any guarantor. LMI protects the lender against a loss should the borrower (or guarantor) no longer be able to afford their loan repayments.
Is Lender’s Mortgage Insurance (LMI) the same as Mortgage Protection Insurance (MPI)?
No - MPI covers the mortgage in the event of death, sickness, unemployment, or disability of the borrower.
How does Lender’s Mortgage Insurance (LMI) benefit the customer?
They can purchase their home with as little as 5% of the purchase price - so they have more options in terms of location, house size, and the ability to undertake renovations.
What are the costs involved with Lender’s Mortgage Insurance (LMI)?
It is a one-off premium charged by the LMI provider to the lender, who generally passes the cost on to the borrower.
The cost of LMI depends on the amount of the loan, the level of equity, and level of risk associated with the loan product.
Many lenders add the cost of the LMI premium to the loan.
Is the LMI premium refundable?
A partial refund of the LMI premium may be applicable if the loan is repaid within the initial years.
How is Lender’s Mortgage Insurance (LMI) arranged?
The lender (or mortgage broker) will prepare the necessary info and will advise the customer if the loan requires LMI, the cost of the premium, and any other info.
