Is there a “best home loan” or “best mortgage rate”?

An important thing is to look around for a lower interest rate for your home loan. It could leave you with more money in your monthly budget, or the option to potentially pay off your home loan years earlier than scheduled. Of course, you still need to look at all the features of your home loan as a low interest rate alone won’t mean much if the other features of your home loan doesn’t suit you.

How do I compare home loans?

There are different types of home loans and they come with different interest rates, fees and a variety of other features. Naturally, they vary according to your individual circumstances. That’s why it’s impossible to say that there’s such a thing as a ‘best home loan rate’.

So, a comparison site can be a great help. It can allow you to compare mortgage interest rates available, the fees and other loan features from a range of lenders and products. By using a side-by-side comparison, you’ll be able to see what makes each loan different.

Interest rates are important of course, but you should consider looking beyond that. What might look like the ‘lowest interest rate’ may get more expensive when you factor in the lender’s fees and charges.

The home loan calculator

Our home loan calculator will help you get some idea of the estimated repayments you could be up for with different loans and interest rates. Click here to try it out.

Consider the home loan comparison rate

Always look at the comparison rate as well as the interest rate when comparing home loans, as the comparison rate includes the interest rate together with most fees and charges. Combined as a single percentage figure, this gives a good picture of how loans compare beyond just the interest rate.

Get interested in interest rates

Keeping an eye on interest rates and what they’re doing in the Australian market will give you a better perspective when comparing home loans. Ask yourself, are interest rates going up or down? What’s the average interest rate this month? Is it a good time to consider a fixed interest loan? Or what about a partially fixed loan (i.e. a split loan) that allows you to fix a part of your loan and keep a variable rate on the rest of it?

Caution pays, so take the time to understand the product you’re considering

Tread carefully if a lender is boasting a particularly low interest rate for a honeymoon period. Offers like these often run out after a couple of years. Then you may find yourself on with a higher interest rate.

If you end up in this situation, refinancing is generally an option. However, refinancing from a fixed rate mortgage before the fixed period ends could result in break fees.
Also beware of claims about home loan features that can help you pay off your loan faster. Generally, the only way that usually happens is by increasing your repayments, or finding a more competitive home loan interest rates or a home loan with lower fees. However, using a feature such as an offset account may reduce the interest you are charged. This means that you may be able to increase your repayments, due to these interest savings.

Translating ‘home loan speak’ into English

As you’re going to be looking around at home loans, it’s a good idea to know the language. It’s not a hard language to learn, just a few key terms will put you in a better position to compare competitive home loan rates

The Reserve Bank of Australia (RBA):

The RBA sets the official cash rate (OCR), which has been set at a very low rate of 0.10% since November 2020 (at August 2021). This isn’t the interest rate you’ll be offered for your mortgage, however. Your bank or financial institution sets their own rates using the RBA cash rate and a range of other factors. The cash rate is reviewed almost monthly and is subject to change.

Variable interest rate home loans:

As their name suggests, variable interest rates vary – they go up and down in response to changes made by your lender. Variations can also be made when there are changes made by the RBA to the cash rate. A home loan with a variable interest rate generally allows more flexibility to make additional payments or pay your loan out early without penalties, such as break costs charged to fixed rate borrowers.

Fixed interest rate home loans:

Fixing a low interest rate for a period of 1 to 5 years can have benefits. It’s a way to protect yourself from future interest rate rises, or to have some certainty when planning your budget. But if interest rates fall, you won’t benefit from the newly reduced figure. There may also be less flexibility with making additional repayments, or break fees associated with paying out your loan early.

Loan to value ratio (LVR):

This figure is calculated by dividing the total amount of your home loan by the value of the property. It’s a number used by lenders to help determine how much they'll lend you.

If there isn’t a ‘best home loan’ what do I look for?

This is all about finding a home loan that is suitable for you. As we said, ‘there’s no such thing as the best home loan rate’, because it’s not as simple as that, there are other things to consider, like the following:

• Loan features: A basic ‘no frills’ home loan may well have a lower comparison rate than another home loan, but another loan could be include features beneficial to you such as:
  • Redraw facility or a line of credit
  • Ability to make extra repayments
  • An offset account

Features like this could save you money, but they don’t usually come for free. Whether these features will save you more money than you spend on them will depend on your circumstances.

• Ongoing fees: check the fees on your loan, especially for added features, they could end up costing you more than the features save you.
• Investment Loans: You might also encounter different conditions and interests if you’re looking for a mortgage for an investment property rather than a standard owner-occupier home loan. Using a comparison site can help you understand and work through some of these variables as you go.

If you already have a home-loan, are you satisfied?

You’ll get the answer to this question when you start looking at other options. The truth is, home loan lenders may not always reward loyalty. If you find that your current mortgage is not a great deal, with high fees and interest rates, it could be adding years to your home loan, and taking money out of your pocket.

Refinancing isn’t that difficult so don’t fall into the trap of thinking that it all seems too hard. When you look at the amount of money that a better home loan can save you over the life of the loan, you’ll realise that the little effort required to change will be well worth it.

Compare home loans with iSelect and Lendi

iSelect has partnered with Lendi to help make it easier for iSelect customers to find a suitable home loan. Get started comparing home loans from 35+ lenders online the easy way, or give Lendi a call on 1300 186 260 (08:30-18:30).

Last updated: 09/09/2021

Sources:
1. https://moneysmart.gov.au/home-loans/choosing-a-home-loan
2. https://www.rba.gov.au/
3. https://moneysmart.gov.au/property-investment