When you’re comparing home loan interest rates in Australia, it’s useful to understand how they work and which factors influence variable interest rates. You can delve into the key information on interest rates with Savvy and find out where to find the cheapest loans, and how you can get the best mortgage rate possible, by comparing your home loan options.
Interest is the money a lender charges a home loan recipient for borrowing money. It’s calculated daily as a percentage of the amount of money that is loaned and is expressed as a percentage number per annum (p.a.). Think of it as a fee you’re charged for borrowing money. The lower the interest rate, the less you have to pay for your home loan mortgage. For this reason, comparing home loan interest rates is vitally important if you want to find the lowest interest rate loan on the market in Australia. That’s why comparing home loans with Savvy to find the best mortgage rate can potentially save you thousands.
How does the Reserve Bank affect home loan interest rates?
The Reserve Bank of Australia (RBA) sets the daily cash interest rate, which is the base interest rate the banks use (both nationally and internationally) to loan money to each other. As of early 2022, this cash rate stands at 0.10%, which is a record low in Australia and has led to current mortgage rates starting just above 1.5%.
The banks and lenders base their own home loan mortgage rates on the Reserve Bank cash rate and tend to increase or decrease their current mortgage rates in line with changes announced by the RBA after their meeting on the first Tuesday of every month (except January). A very low RBA cash interest rate leads to low interest rates for home loans, car loans, personal loans and more. It’s good for borrowers, but not for savers.
How is interest on a home loan calculated?
Interest on a home loan is calculated based on the outstanding balance of your loan at the end of each day. To find out how much interest you are paying per day, multiple your loan sum by your interest rate (expressed as a decimal number) and divide this by 365 to get your daily interest rate.
For example, say you have a loan of $450,000 and your interest rate is 2.5%. Your daily interest is calculated as:
($450,000 x 0.025) ÷ 365 = $30.82 per day interest
This daily interest figure is multiplied by the number of days in the month, and this is the monthly interest you’ll pay. As your outstanding principal decreases, so too will the cost of interest on your home loan. You can use Savvy’s handy home loan repayment calculator to tell you how much interest you’ll pay on any loan sum over a set loan period.
What is the difference between a base interest rate and a comparison rate?
Under the National Consumer Credit Protection Act 2009 (commonly known as the National Credit Act), all lenders are obliged to display the interest rate they charge for lending money (be it for a home loan, a car loan or a personal loan) but also a comparison rate alongside it. This comparison rate must include the fees and charges which form part of that loan’s terms and conditions, so that consumers are able to make valid comparisons between different loans.
The fees and charges that are included in the comparison rate include loan establishment fees, on-going account-keeping or administration fees and annual account charges. However, a loan comparison rate does not include government fees or charges, or other charges such as loan exit fees which a borrower may choose to pay if they want to refinance and break a fixed term loan agreement.
How is the comparison rate calculated?
All home loan comparison rates are based on a $150,000 loan taken out over 25 years, so that borrowers can see how the fees and charges attached to the loan increase the base interest rate. For example, the advertised base interest rate may be 1.89% p.a., but the comparison rate is 2.5% p.a. This means when the lender’s fees and charges have been added on to the basic interest rate charged for the loan, you will actually pay the equivalent of 2.5% p.a., not 1.89% p.a., for that particular loan. That’s why the comparison rate is the more important number to use when comparing mortgage interest rates, or any home loan rate for that matter.
When you’re comparing interest rates in Australia looking for the best home loan, you can choose between a number of different types of loans. There are hundreds of different lenders and loans available in Australia, which is why Savvy can help you find a home loan with the best interest rate that is just right for your individual needs. Some of these include:
Variable interest rate loans
Australia’s most popular loan, a variable interest rate home loan has a fluctuating interest rate. It will move in line with national interest rates, influenced by rate movements announced by the RBA. In return for a variable interest rate, these flexible loans come with a variety of interest-saving features which can save a borrower thousands of dollars on the cost of their loan, if used sensibly. These include:
Fixed rate home loans
Fixed rate home loans make it far easier to budget around your loan repayments, because the interest rate you pay is fixed for a set period of time, as they don’t change over the fixed period of the loan. The most common fixed rate terms are between one and five years.
While it’s great to known exactly how much your loan repayments are going to be in a year’s time, there can be disadvantages with fixed rate loans. They tend to be less flexible than variable interest rate loans and don’t usually offer interest-saving features such as offset accounts or the ability to make additional repayments. They also may not allow you to redraw any additional payments you may have made towards your loan, and you’ll be charged break fees (also known as early exit fees) if you want to refinance your loan before the end of the fixed term.
Split rate loans
These loans combine the best of both worlds, as a portion of your loan is fixed and another is left on a variable rate. The result is that you get all the benefits of a variable rate loan – flexibility and additional features – but the security of having protection against interest rate rises by having a portion of your loan on a fixed schedule. You are able to decide how you split your loan, for example 60/40 or 70/30. However, you may end up paying more account-keeping fees for doing so, given that you’re splitting your loan into two accounts.
First Home Loan Packages
Some lenders offer financial packages specially designed for first-time buyers which can include very attractive low interest rates. These packages are home loans that incorporate other services, which can include everyday transaction accounts, credit cards, an offset account, home and contents insurance and financial advice. A yearly package fee is usually charged, which covers the fees on all the financial services offered. The advantage of a loan package is that you only have to deal with one lender for all of your finance needs. The disadvantage is that you can’t shop around for a better deal on one portion, such as insurance, when you’ve agreed to a package deal with one bank.
These are loans where you only pay the interest portion of the loan, and do not make a dent in the principal sum you borrow. They are particularly suited to:
Interest-only loans may not be a suitable choice for every borrower, as they work out to be more expensive overall than a standard principal and interest loan, so make sure you seek professional financial advice before signing up for an interest-only loan.
Comparing loans until you find one with the lowest home loan interest rate that suits your personal situation is a great start on your home loan journey. Savvy can help you on this journey by presenting home loan comparison information side-by-side so you can clearly see which loan is best for you.
Some of the lowest interest rates in Australia at present are offered by online lenders. These lenders are governed by the same rules and regulations as the big banks – and are just as safe – so they’re well worth looking at whether you’re considering your first loan, or refinancing to get a better deal.
The larger the deposit you’re able to offer, the better your chances of being offered the lowest possible interest rate. The industry-standard deposit is 20% of the cost of the property you wish to purchase, so if you’re able to offer 25% or even 30% as a deposit, you’ll get a great interest rate and the lowest fees possible on your loan.
If you combine a large deposit with a high credit score and stable employment, you are placing yourself in the ‘prime borrower’ category, meaning you will be considered a low-risk borrower. This means you’re likely to be eligible to be approved for loans with the lowest interest rates in Australia.
Compare loan mortgage interest rates with Savvy and look at the fine details of all the possible loan options before you. See which loans have the most useful features and the lowest fees before making a decision about which home loan to apply for. This way you’ll apply to your preferred lender well prepared, and stand the best chance of being offered a highly competitive interest rate.