CPI stands for Consumer Price Index. It is a measure of the prices paid by households for goods and services. With the latest CPI announcement coming into effect on April 1, now is the perfect time to understand what CPI is and how it can affect your home loan.
The simplest way to think about CPI is to imagine a big basket filled with goods and services that are bought by Australian households. Put in some food, clothes, furniture, school fees and even a car. If you purchased that same basket every year, the total price of the basket would change. CPI is the measure of the price change of that basket over time.
The amount that CPI changes in one year is used as a measure of inflation. If CPI is 2%, it means there has been a 2% increase in the price of the basket over the year.
Do you remember when a bag of lollies at school was 10 cents, and now it’s a couple of dollars? Or are you sick of your parents saying “in my day, a week’s worth of groceries cost $15”? These changes in prices over time (CPI), represents inflation at work. Fluctuations in prices are also affected by demand and supply and the value of the Australian dollar.
Ok, so how does HomeStart use CPI in relation to its loans?
The first way HomeStart uses CPI is to do with loan repayments. Our ‘Repayment Safeguard’ means that typically, HomeStart loan repayments don’t change when interest rates do. Usually, the only change to the repayments will be a yearly adjustment for inflation. Even though the repayments may increase a little based on CPI, over time the payment as a percentage of your income should remain about the same if your income is also rising by CPI.
The other way HomeStart uses CPI is to set the subsidised interest rates for the Advantage
loans. HomeStart takes an average CPI figure based on the average over 6 months to adjust the interest rates. As of 1 April 2018, the rates for the Advantage and Equity loans are 2.52%. To give you an idea of how much these rates have been subsidised, our HomeStart loan (variable) rate is currently at 5.24% - a saving of 2.72%. Have any more questions about CPI and how it could affect your repayments on your top-up loan?
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