Finding a suitable home loan interest rate is one of the most important features to consider when comparing loans: a lower interest rate could mean more money in the budget for everyday living, and paying off your mortgage years earlier.

Making complicated financial decisions can be daunting, but it’s worth your time to find a suitable deal on your home loan interest rates.

Understanding the language of home loans

Banking and finance can seem like it has a language all of its own. By getting across some of the terms banks and lenders use when they talk about interest rates, you can put yourself in a good position to find competitive interest rates on a home loan that suits you.

Terms to understand:

• The Reserve Bank of Australia (RBA): the RBA sets the ‘cash’ interest rate¹, which has been set at a very low rate of 1.5% since August 2016². Your bank or financial institution sets their own rates using the RBA cash rate and a range of other factors.
• Variable interest rate home loans: variable rates can go up and down in response to changes made by your lender. Their variable interest rate will usually (but not always) change depending on changes made by the RBA to the cash rate. A home loan with a variable interest rate usually allows more flexibility to make additional payments or pay your loan out early without penalties, such as extra or exit fees.
• Fixed interest rate home loans: if you find a good interest rate, a fixed rate home loan lets you lock it in for a set time, usually from 1 to 5 years. You might choose this option to protect yourself from future interest rate rises, or to have some certainty when planning your budget. The downside to a fixed interest rate is if interest rates fall, you won’t benefit, and there might be less flexibility with making additional repayments or paying out your loan.
• Loan to value ratio (LVR): is calculated by dividing the total amount of your home loan by the value of the property.

How to compare different home loans

When you start researching home loan interest rates, using a comparison site helps to compare apples with apples: you can compare mortgage rates, fees, and other loan features side by side and see exactly where they’re different.

Interest rates are important, but they’re not the whole story – each lender will have their own fees and charges. When comparing home loans, look at the comparison rate as well as the interest rate³. The comparison rate includes the interest rate and most fees and charges, combined as a single percentage figure.

It’s also a good idea to get across interest rates and what they’ve been doing in the Australian market⁴. Are they going up or down? What’s the average interest rate this month? Is it worthwhile considering a fixed rate home loan, or a partially fixed rate loan, where you pay a fixed rate on some of your loan, and a variable rate on the other part of your loan?

Be cautious of selling points such as low interest rates for the first couple of years (known as the honeymoon period), and claims that home loan features will help you pay off your loan faster – usually the only way to do that is by increasing your repayments, lowering fees and having a home loan with competitive interest rates.

Finding a home loan that’s suitable for you

A basic or ‘no-frills’ home loan will generally have a lower comparison rate than a home loan with features such as a redraw facility, offset account or line of credit⁵. These features can be convenient, but they’re not free – loans with these features may charge higher interest rates or have ongoing fees that add up over the course of the loan.

If you’re thinking about a mortgage for an investment property⁶, it’s likely to have slightly different conditions – and a different interest rate – than a standard ‘owner-occupier’ home loan. You may be able to access an interest only loan, or use equity in a property you already own.

Are you satisfied with your current home loan interest rate?

Unfortunately, there are no prizes for loyal customers – when you investigate the interest rate and fees for your current mortgage, you may find you’re not getting a great deal with your home loan interest rate. This could be adding years to your mortgage.

Don’t fall into the trap of staying with your lender because it seems too complicated to refinance to another lender with a lower interest rate.

If you compare interest rates and features and see a better deal, the new lender can probably help you switch without too much hassle. Refinancing too often is likely to cost you more than it saves, but that doesn’t mean you shouldn’t set aside time for a quick, regular check in on whether your home loan interest rate and features are still working for you.

If you do find you aren’t getting a good deal and decide you want to change lenders, you’ll need to weigh up lower interest rates with the costs of changing home loan providers, which may include exit or break fees, and establishment fees.

Sources:
1. https://www.rba.gov.au/
2. https://www.rba.gov.au/statistics/cash-rate/
3. https://www.moneysmart.gov.au/borrowing-and-credit/home-loans/interest-rates/comparison-rates/
4. https://www.moneysmart.gov.au/borrowing-and-credit/home-loans/interest-rates/
5. https://www.moneysmart.gov.au/borrowing-and-credit/home-loans/choosing-a-home-loan/
6. https://www.moneysmart.gov.au/investing/property/