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.

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.

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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.‍

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.

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.

^ Unloan offers a 0.01% per annum 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. This discount is applied to each loan that you have with Unloan. If you have multiple loans (e.g. one investor and one live-in loan), they will each have a discount calculated based on when you settled each loan. Unloan may withdraw this discount at any time.

There are no fees from Unloan. However, there are some mandatory Government costs depending on your state when switching your home loan. For convenience, Unloan adds this amount to the loan balance on settlement.

* Other third-party fees may apply. Government charges may apply. Your other lender may charge an exit fee when refinancing.

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What fees are involved when purchasing or refinancing?

Calculations are not a loan approval. Applications are subject to credit approval, satisfactory security and minimum deposit requirements. Full terms and conditions will be set out in our loan offer, if an offer is made.

^Rates shown are inclusive of a 0.01% p.a. discount off our reference rate. On each anniversary of your loan’s settlement date, you will receive an additional discount of 0.01% per annum, up to a maximum discount of 0.30% per annum. For purchase loans with a Loan to Value Ratio (LVR) between 80.01% - 90% LVR, a lenders mortgage insurance (LMI) premium and higher interest rate apply. In some cases depending on the property’s location or type, LMI may also be required for LVR between 70.01% and 80%.

*Comparison rate is calculated on a $150,000 secured loan over a 25 year term. WARNING: This comparison rate is true only for the examples given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.

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