What are Basis Points?
Learn what basis points are and their significance in home loans. This guide simplifies the concept to help you make informed decisions on refinancing or purchasing, with tips on managing interest rate changes.
When it comes to home loans, there are a lot of seemingly complex terms that can appear confusing. One of these is “basis points”. While this may sound like an advanced financial concept, it’s actually quite simple!
Understanding basis points can help you make better decisions about things like refinancing, buying a new home, or simply navigating the home loan process. In this article, we’ll explore what basis points are and how they affect your home loan choices.
Firstly, What are Basis Points?
A basis point is a unit of measurement used in finance. One basis point is equal to 1/100th of 1 percent, so:
- 1 basis point = 0.01%
- 50 basis points = 0.50%
With home loans, basis points are used to describe changes in interest rates. So, if you hear that a loan's interest rate has increased from 3.50% to 3.75%, it has risen by 25 basis points.
It's a bit like measuring temperature in degrees. Just as one degree is a small unit of measuring temperature, one basis point is a small unit of measuring changes in interest rates.
This small unit allows for very precise adjustments to interest rates, which is important in financial matters like home loans or savings accounts.
Why are Basis Points Important in Home Loans?
Basis points are crucial in the home loan industry for several reasons:
- Precision: Basis points allow for precise descriptions of interest rate changes. As a small change in rates can significantly impact your loan over time, accuracy is key.
- Understanding rate changes: Lenders often adjust interest rates in terms of basis points. Knowing how to interpret these changes can help you better understand the terms of your loan.
- Comparing loans: When shopping for a home loan, you'll probably compare rates from various lenders. Understanding basis points can help you accurately compare these rates.
How Do Basis Points Affect Your Home Loan?
Let's put basis points into a real-world context.
Suppose you're considering a home loan of $500,000, with an interest rate of 3.50%.
If the rate increases by 25 basis points - to 3.75% - the difference might seem small.
But this increase can significantly impact your monthly repayments and the total interest paid over the life of the loan.
It’s important to note that the Reserve Bank of Australia (RBA) dictate basis points and bank have no influence over this. Learn more about the RBA cash rate.
Tips for Dealing with Basis Points
- Stay up to date: Keep an eye on financial news, as interest rates can fluctuate based on economic conditions.
- Use online calculators: Interest rate calculators can help you understand how a change in basis points could affect your repayments.
- Talk to a professional: Chat with your financial advisor or mortgage broker to get expert advice on the impact of basis points on your home loan.
While basis points might seem like a minor detail, they’re an important consideration when navigating the home loan process. Equipping yourself with a good understanding of how basis points work - and how they can impact your situation - will help you make smarter financial decisions, both now and in the future.
Keen to learn more about the home-buying process? Check out our other articles and stay in the know about all things home loans.
This article is intended to provide general information only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Please consider seeking financial advice before making any decision based on this information.
