What are basis points?
Learn what basis points mean in home loans, how they influence your interest rate, and why lenders use them.
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.
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.
Unloan is a division of Commonwealth Bank of Australia.
Applications are subject to credit approval, satisfactory security and you must have a minimum 20% equity in the property. Minimum loan amount $10,000, maximum loan amount $10,000,000, and total borrowings per customer across all Unloan loans is $10,000,000. (For purchase loans a minimum 10% equity is required - however a Lenders Mortgage Insurance (LMI) premium and higher interest rate apply. In some cases, depending on the property’s location or type, an LMI premium may also be required for LVR between 70.01% to 80%). For loans with Lenders Mortgage Insurance (LMI) the minimum loan amount is $10,000, maximum loan amount is $3,000,000 and total borrowings per customer across all Unloan loans is limited to $3,000,000).
Unloan offers a 0.01% per annum loyalty discount on the Unloan Live-In rate or Unloan Invest rate upon settlement. On each anniversary of your loan’s settlement date (or the day prior to the anniversary of your loan’s settlement date if your loan settled on 29th February and it is a leap year) the margin discount will increase by a further 0.01% per annum up to a maximum discount of 0.30% per annum. Unloan may withdraw this discount at any time. The discount is applied for each loan you have with Unloan.
*At Unloan, we do not charge any annual, application, banking, account, transaction, late or exit fees. In certain circumstances you may be required to pay a Lenders Mortgage Insurance (LMI) premium. Learn more about why this is applied and how it works. Government fees may also apply. Learn more about government fees here. Your current lender may charge an exit fee when refinancing.
Tax law is complex and subject to change. For the latest information, check the ATO website or with your accountant or financial advisor.
Unloan is a division of Commonwealth Bank of Australia is also not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and you should seek tax advice from a registered tax agent or a registered tax (financial) adviser if you intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.
Applications are subject to credit approval, satisfactory security and you must have a minimum 20% equity in the property. Minimum loan amount $10,000, maximum loan amount $10,000,000, and total borrowings per customer across all Unloan loans is $10,000,000. (For purchase loans a minimum 10% equity is required - however a Lenders Mortgage Insurance (LMI) premium and higher interest rate apply. In some cases, depending on the property’s location or type, an LMI premium may also be required for LVR between 70.01% to 80%). For loans with Lenders Mortgage Insurance (LMI) the minimum loan amount is $10,000, maximum loan amount is $3,000,000 and total borrowings per customer across all Unloan loans is limited to $3,000,000).
Unloan offers a 0.01% per annum loyalty discount on the Unloan Live-In rate or Unloan Invest rate upon settlement. On each anniversary of your loan’s settlement date (or the day prior to the anniversary of your loan’s settlement date if your loan settled on 29th February and it is a leap year) the margin discount will increase by a further 0.01% per annum up to a maximum discount of 0.30% per annum. Unloan may withdraw this discount at any time. The discount is applied for each loan you have with Unloan.
*At Unloan, we do not charge any annual, application, banking, account, transaction, late or exit fees. In certain circumstances you may be required to pay a Lenders Mortgage Insurance (LMI) premium. Learn more about why this is applied and how it works. Government fees may also apply. Learn more about government fees here. Your current lender may charge an exit fee when refinancing.
Applications are subject to credit approval, satisfactory security and minimum deposit requirements. Full terms and conditions are found on our Unloan Terms and Conditions. Modified Terms and Conditions will be set out in our Notice of Variation Agreement, if you are approved. 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.
