Home Loan Interest Rates

Home loan interest rates depend on many different factors. Here’s everything you need to know about borrowing costs.

Everything to Know about Home Loan Interest Rates

When you’re a homeowner, or even if you just plan to buy one, understanding how home loan interest rates work can lead to better financial decisions. The truth is many factors influence why interest rates rise and fall over time – but developing an understanding of that isn’t too tricky. Whether you plan to buy a property as an investment or you just want to get the best deal on an owner occupier mortgage, considering the factors that influence home loan interest rates will make you more able to compare and find the best interest rates and terms out there. 

How do I calculate the interest I’ll be paying on my home loan?

It’s relatively easy to work out how much interest you’re paying on a home loan. It depends on the number of payments you make, the interest rate the lender charges, and how much you borrowed in the first place. Let’s assume you have a home loan for $300,000, your interest rate is 3.6%, and you make monthly repayments:

($300,000 x 0.036) ÷ 365 = $29.59 per day

$29.59 x 30 = $887.67 per month

You’ll pay $887.67 the first month you make a repayment, but that doesn’t stay the same throughout the loan – even though your repayment amount does. That’s because home loans work on what’s called an amortising scale. Every time you make a repayment, you reduce the principal (the amount you originally borrowed). That means you pay slightly less interest and more principal each time, to keep the repayment amount the same and ensure your loan gets paid off on time.

Can I find a lower interest rate with a home loan refinance?

Very possibly, but it will depend on your situation and factors beyond your control, too. Many different economic factors influence home loan interest rates. The fact is, since you took on your current mortgage, the broader Australian economy might have gone through many changes and the interest rate could be a lot lower as a result.

It’s not just the economy that influences how much home loan interest you pay. Every borrower gets their own personalised rate, based partly on their employment history and income. If you’ve had your current home loan for a while but you’ve been promoted since signing up, it could be time to review your options. The lower a risk you represent to lenders, the better the rate you’ll achieve, so consider if increased income could save you some serious money.

Your credit report also influences how much interest you’ll pay on a home loan. You can improve your credit score by paying off existing borrowing and cancelling credit cards or asking for a lower credit limit, but time may have changed how lenders view you too. Bear in mind that negative information disappears as time passes. Your repayment history stays on your file for two years. Personal loan applications and defaults remain for five years, and more serious matters like court judgements and bankruptcy stick around for a similar period.

Can I reduce the cost of home loan interest?

The total cost of your home loan is partly dictated by how long you borrow for. Let’s say you have a 5% interest rate. Repaying over twenty-five years instead of thirty will save you money. Many Australians reduce their interest by switching to a week-based payment system rather than a monthly schedule. If you reduce the term and also make the switch to fortnightly repayments, you can save almost $90,000.

Loan Term Frequency Amount Payments Total interest Total Amount
$500,000
30yrs
Monthly
$2,684.11
360
$466,279.00
$966,279.00
25yrs
Fortnightly
$1,348.30
650
$376,392.14
$876,392.14

Likewise, you can also reduce the length of your home loan by making extra contributions whenever the opportunity arises. Maybe you get a tax rebate once a year, or you could be fortunate enough to receive an inheritance. If you find yourself with some extra funds, repaying some of your mortgage is hardly ever a bad idea.

An offset account links to your home loan, reducing the interest you pay. Whatever money you keep in the account counts against your home loan, effectively meaning your loan principal is lower. That saves some homebuyers thousands of dollars and years of mortgage repayments, depending on how much they keep in their offset account.

Apart from the economy, what else affects home loan interest rates?

Home loan interest rates can rise and fall for a number of reasons. Here’s a brief guide to why that happens.

  1. The broader Australian economy: One way that home loan interest rates change is when the economy, and therefore, the housing market, is thriving. The demand for home loans increases, and that can make money harder to come by for lenders. It’s simple supply and demand. Just like a specific item you might want to buy in a store costs more when lots of people want to buy it too, money costs a lender more when there’s a high demand for loans. That drives interest rates up. If, on the other hand, the property market slows down, money is easier to come by, and lenders charge less, so the interest rate falls.
  1. Inflation: The easiest way to look at how inflation affects mortgage rates is to consider that lenders ‘buy’ money at one rate and then lend at another, and they must make a profit. When inflation is high, it means the cost of goods is higher too, and that essentially means your dollar is worth a little less. When that happens, lenders need to charge a higher interest rate on each dollar they lend to benefit by the same amount – so interest rates go up. When inflation is low, the opposite occurs. In Australia, inflation is low at the moment because growth in the economy is also down. That’s great news if you need a home loan.
  1. The Reserve Bank of Australia (RBA): The RBA sets the cash rate according to what the wider economy is doing. Lenders base their interest rates on the cash rate. The RBA can also control how much money circulates in the economy and therefore is available to lenders. Sometimes called quantitative easing, the RBA does that to keep inflation under control. It deposits additional funds into its own bank accounts, and they become available to lenders, causing home loan interest rates to either fall or remain low.
  1. Australia’s rental market: One of the reasons we’re lucky enough to be enjoying low home loan interest rates right now is that there’s a big rental market in Australia. When lots of people rent because new or affordable homes are in short supply, it can have the effect of keeping home loan interest rates low. That also drives rents up and makes things fruitful for investors.

Your Frequently asked Home Loan Interest Rates Questions

Find out why interest rates rise and fall, how the RBA affects mortgage rates, and how to use comparison rates.

Why do home loan interest rates rise and fall?

The RBA can influence inflation and interest rates by way of protecting the wider economy and reacting to global economic trends. Globally, ageing populations and other factors are driving growth down. If inflation rises or the economy begins to grow, that’s a sure sign that home loan interest rates will soon be on the rise.

Should I consider other factors besides interest rates when I choosing a home loan?

It’s also essential to check for home loan fees when you compare mortgages. Just like with home loan interest rates, fees can add up to a whole lot of money over the course of a long mortgage.

How do I use comparison rates?

Home loan listings show two different rates. One is the interest rate, and the other is the comparison rate. It displays any extra costs, such as setup and account fees, as an adjusted interest rate. Comparison rates are there to make weighing up different home loan offers quick and easy.

If I’m self-employed, will I pay higher home loan interest rates?

You’re likely to pay slightly higher home loan interest rates when you’re self-employed. However, if you have good documentation and can prove you have a regular income, you probably won’t be too badly affected when you apply for a self-employed home loan. If you require a low doc mortgage, you’ll definitely be penalised with higher rates.

Why do banks sometimes not pass on interest rates cuts when the RBA announces a cut in interest?

Low interest rates make things a lot harder for banks. The fact is banks take deposits, and they lend money too. Think of them as being a middle-man between savers and borrowers. They borrow deposited money to lend out. Depositors expect a return on their investment for that reason, but home loan applicants also demand great interest rates when the cash rate is so low. If interest rates are right down, banks are often relying on the loyalty or apathy of existing customers to make a profit – and some will stick around. However, the savvy thing to do as a borrower is to refinance your home loan and reap the resulting rewards while they’re available.