Introduction to Interest Rates
With an interest rate comparison you can save big money on your debt repayments. Let's face it... interest rates affect everyone in the world. They help control the flow of money within an economy. An interest rate is simply a percentage fee charged to a borrower for the use of funds. Interest is most often associated with consumer lending but there are a variety of interest rates to become familiar with. Learning what interest rates are and how it affects you will empower you to make better decisions when it comes to your personal financial future.
View an interest rate comparison of world interest rates here.
Primary Types of Interest Rates
While there are a variety of interest rate types, there are 3 primary types that you should become familiar with, including:
- Variable Interest Mortgage Rate- This interest rate refers to the mortgage interest rate offered to investors at a few points above the Prime rate set by the Reserve Bank interest rate. The variable interest mortgage rate varies with the Reserve Bank Interest Rate and is of particular interest to consumers who are seeking mortgage loans. During periods of time with high variable interest mortgage rates, current borrowers often seek to refinance their loans to loans with lower interest rates to lower their monthly required loan payment.
- Fixed Interest Mortgage Rate- This interest rate refers to fixed mortgages, typically either 15 or 30 years in length. When consumers or the media refer to interest rate changes, they are generally talking about this rate. When fixed interest mortgage rates are low, consumer property purchases often rise as well as consumer refinancing of current fixed or variable mortgages.
- Reserve Bank Interest Rate- The Reserve Bank Interest Rate refers to the overnight interest charges in between banks for reserve balances of cash. It is also the Reserve Bank Interest Rate that most closely correlates to the interest rates offered to consumers when they are seeking personal or business financing. The Reserve Bank meets several times a year to discuss the Reserve Bank interest rate and more often during times of economic crisis.
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| • 02/09/2010 | Do you think the RBA (Reserve Bank of Australia) will raise interest rates in March 2010? |
Comparison Interest Rate and APR vs. APY
When seeking to understand interest rates, it is important to become familiar with the primary difference between Annual Percentage Return (APR) and Annual Percentage Yield (APY). APR refers to the annual interest rate without considering the impact of compounding interest within the year being evaluated. This is the rate that is commonly quoted by the banks in relation to borrowing. APY, however, does take into account for the effects of compounding on the overall interest rate.
APY is more commonly referred to as a comparison interest rate as it takes into account the compounding of interest over a given time frame, most commonly over the space of 1 year. When it comes to mortgage interest rates it is essential to look at the comparison interest rate as it is calculated over the lifetime of the lloan. This allows you to see the real differences between loans that may have the same base interest rate but different time periods for calculating compounding interest, and view the real total cost in terms of interest paid over that period.
To understand why interest rates move up and down from time to time, why not have a read of our article on What Drives Interest Rates?
