Home Loan Interest Rates

Whether you’re a first home owner, investor or upsizer, we’ve got the information you need to compare and save on your home loan interest rate.

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, updated on August 7th, 2023       

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Compare loans and save with Savvy

As a core component of home loans, it’s important to understand how interest rates work and the ways that you can look to optimise them. Finding the right rate for your loan can help you save thousands, so it’s worth investing time and effort into. You can start the comparison process and find the best home loan rates of all different types right here with Savvy.

With Savvy, you can compare your loan options to ensure you’re choosing the best deal available for your situation.  All the information you need to make an informed financial decision is right here in one place, so you can select your mortgage with a low interest rate, alongside other features, and apply to your preferred lender in no time.

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Home loan benefits you can enjoy

Highly competitive interest

Compare offers starting from the lowest rates on the market, which could potentially save you thousands of dollars throughout your repayments.

Fixed rate, variable or split?

Have a say in the type of interest rate that’ll apply to your home loan by selecting either a fixed, variable or split rate.

No-fee options available

Fee-free home loan options are becoming more common as competition between lenders hots up, so you can compare lenders and find more affordable options here.

The term flexibility you need

Choose your loan term up to 30 years, enabling you to pay off your mortgage at a pace that’s comfortable for you.

Set your own schedule

Choose to make your loan repayments weekly, fortnightly or monthly so that you can set a schedule that suits your income needs.

Loan pre-approval available

Home loan pre-approval will give you a good indication of your borrowing power, allowing you to budget and start considering potential properties with more confidence.

Home loan interest rates explained

How is the interest on my home loan calculated?

The interest you pay on a home loan depends on the amount you’ve borrowed, the number of payments you make and the interest rate the lender charges.

For example, let’s assume you have a home loan of $300,000, your interest rate is 2.9% p.a. and you make monthly repayments. The way to calculate how much interest you pay is based on the formula ‘(Principal amount x interest rate) ÷ number days in a year = amount per day’. Using this formula, we can work out the following:

($300,000 x 0.029) ÷ 365 = $23.83 per day

$23.83 x 30 = $715.07 per month

You’ll pay $715.07 in interest in the first month of your home loan, but that won’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.’ The word ‘amortising’ simply means the process of reducing debt by making regular payments.  Every time you make a repayment, you reduce the principal (the amount you originally borrowed).  This means you pay slightly less interest and more of your principal each time you make a repayment, which ensures your loan is paid off on time.

How are home loan interest rates determined?​

All lenders are free to set their own home loan interest rates, which is why there’s such a wide variety of loans and interest rates in the Australian home loan market.  However, all lending decisions are based on the official cash interest rate, which is set by the Reserve Bank of Australia (RBA). This rate essentially sets the interest rate at which banks lend money to each other and internationally.

The RBA meets on the first Tuesday of every month (except January) to decide in which direction the interest rate will move.  Their monthly pronouncements every first Tuesday in the month sets the direction for all other lenders in the country to adjust their own interest rates.  While lenders aren’t required to increase or decrease their rates in line with the cash rate, many do so.

The RBA acts independently from the government, and even the Prime Minister can’t influence which way the cash rate will go (or if it will remain steady, which it did for much of 2021).  RBA decisions are based on a range of financial indicators such as inflation, the unemployment rate, and predicted levels of investment by both large and small businesses.

What’s the difference between a loan’s interest rate and comparison rate?​

There are two elements to a home loan: the interest rate charged and any associated fees.  The interest rate quoted for a loan is just that – the amount you’ll pay per year in interest.  The comparison rate of a loan accounts for the interest rate plus any fees (such as an establishment fee and monthly account-keeping fees).  Therefore, a loan’s comparison rate is a more accurate assessment of what that particular loan will cost you when all standard fees have been added on and considered.  You can use Savvy’s home loan comparison rate calculator to calculate what your loan will cost you over the years, and how much you’ll end up paying in fees overall.

How is a loan’s comparison rate calculated?

A home loan’s comparison rate is based on a $150,000 loan taken out over 25 years.  All lenders are required to display the loan’s comparison rate by law after amendments to the Consumer Credit Code were passed in the Australian Parliament in 2003.  These laws apply to all code-regulated credit contracts including all mortgages, personal loans and term loans, but do not apply to credit cards, consumer leases and overdrafts. 

Government legislation also requires the following standard warning is displayed whenever comparison rates are quoted: ‘This comparison rate is true only for the example given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.’

What this warning means is that a loan’s comparison rate is only relevant to the one specific product you chose and doesn’t take into account other options you may select which could add more to the cost of the loan. 

For example, you may decide to add an offset account to your loan, for which you are charged an additional $10 a month. The comparison rate you saw quoted will not take into account this additional charge you’ve chosen to pay, which might increase the overall comparison rate of that particular loan. 

Other fees which may not be taken into account in the comparison rate include:

  • mortgage registration fees – all mortgages have to be registered with the relevant state’s Land Titles Office, for which there is a fee up to $200 (depending on which state you live in)
  • early exit or repayment fees – which may be charged if you refinance your loan or pay off your loan sooner than the original loan term. The size of the fee will depend on the amount of your loan, interest rates and the time remaining on your fixed term when you choose to break the contract
  • redraw fees – which you may be charged if you decide to redraw additional payments you’ve made into your loan account, typically sitting at around $50
  • linked account fees – some loans which come complete with offset accounts have a condition that you open another linked savings account, for which you may be charged an establishment fee
  • package fees – some loans may not have an establishment fee per se, but they do come with the condition that you have your credit card, transaction account and savings bank account linked and that you pay a package fee for this ‘bundle’. The cost of having to pay this package fee (which can be as high as $650 per year) will not be reflected in the loan’s comparison rate
  • loan termination fees – which can be charged when you pay off your loan. They cover the cost of de-registering your loan with the Land Titles Office in your state, costing up to $400 in most cases

What is an interest-only home loan? How do they work and who are they for?​

An interest-only loan (IO loan) is a specific type of loan which is mainly suitable for borrowers in particular (more unusual) circumstances.  This is because with this type of loan, there is no repayment made on the principal sum borrowed for the first one to five years; it’s only the interest generated by the loan which is repaid.  It may sound ridiculous to take out a loan which you don’t intend to repay, but there are circumstances where such a loan is a valuable method of building wealth and makes sense, such as:

1. Investment property IO loans – tax advantages

Under Australian property law, any costs associated with investing in property are tax-deductible, meaning you can claim them as a deduction from the amount of income you have to pay income tax on.  The interest on an investment loan is one such cost (along with the cost of preparing your tax return, etc.)  Therefore, if you have a principal and interest loan on your investment property, you can only claim the interest portion as a tax deduction. 

However, if you have an interest-only loan, you can claim 100% of the loan repayment as a tax deduction.  This is only really worthwhile for those who are looking to sell their property within the next few years, as IO loans cost more than standard principal and interest (P&I) loans.

  • For example: Investors frequently take out an IO loan for a five-year period. In this time, they pay only the interest on the loan, which they claim as a tax deduction, thus reducing the income tax they pay.  After five years, the property has increased in value by $20,000, so they sell the property, pay off the original loan in full and end up with a capital gain plus five years’ worth of useful tax deductions.

2. First home buyer IO loanspayment relief

Buying a first home is an expensive business.  Not only do you have to provide a deposit, but pay stamp duty, removal costs, home insurance and utility connection fees.  You’ll also have to start buying furniture for your new first home.  For some young first home buyers who may be at the start of their professional careers or still studying at university, these costs can be quite prohibitive.

Some lenders will allow first homebuyers to take out an interest-only loan just for the first year or a short, negotiated period.  This results in lower monthly repayments, as only the interest portion of the loan is paid. In this first year, the homeowners can afford to furnish their home and pay off any of the additional associated costs such as stamp duty and removal fees.  Once these debts have been cleared, they can let their loan revert to a standard setup or refinance to one with a better rate and start paying the more usual principal and interest on their loan.

A variation of this arrangement is the introduction of the ‘honeymoon’ loan, which offers first homebuyers a reduced variable interest rate (also called an introductory rate) on their loan for the first one to three years. This allows them to get back on their feet financially with lower monthly repayments, before taking on the full cost of paying back their loan.  Use this introductory rate calculator to see how a honeymoon rate affects your loan cost overall.  In many cases, paying P&I from the beginning of the loan may make more financial sense and could potentially save you tens of thousands of dollars in the long run.

3. Construction IO loans – flexible staged payments

A further use of interest-only loans is made by people wanting a loan to build their own home.  Construction loans are often interest-only at a fixed interest rate for a fixed period (traditionally 12 months) and are paid in instalments directly to the builder who is constructing the home.  The instalments are made when certain pre-agreed milestones are reached, such as the slab being poured, lockup phase, first fix completion and so on.  Such IO construction loans are fully paid out at the end of the year when the house is complete and the homeowner refinances the loan to another variable rate, fixed rate or split loan.  This IO loan arrangement allows flexibility between the borrower, lender and builder, as cost blowouts or time delays may alter the final price of the built home.

How to reduce the interest paid on your home loan

Your frequently asked home loan interest rate questions

What other factors should I consider when choosing my loan?

It’s essential to check other variables like administration and setup fees and other ‘hidden extras’ when you compare mortgages.  Additionally, you’ll need to consider whether your lender offers the loan term and the size of deposit that you’re looking to choose, as both of these will have a significant impact on the cost of your loan.

Will my credit score affect the interest rate I’m offered?

There is not a direct correlation between your credit score and the interest rate you’ll be offered, but the health of your credit record will certainly affect whether you’ll be able to apply for the best home loans with the lowest interest rates.  Such prime low-cost loans are usually only offered to borrowers who have a high credit score and can offer the full 20% deposit required.

If I’m self-employed, will I pay a higher interest rate?

No – if you can show documents to prove you have a steady income (such as your tax returns over several years), you’ll be eligible to take out a home loan in the same way as anyone else. The longer you’ve successfully been in business, the greater your chances of approval. However, you might be offered a slightly higher interest rate when you’re self-employed if your income is irregular and you don’t have much documentation.

Can I refinance with the same lender to get a better interest rate?

Yes – it’s worthwhile searching for loans with lower interest rates and talking to your bank or lender to see if you can refinance and get a better deal.  Being aware of offers in the market consistently, even after you’ve signed onto your home loan, can help you save thousands. Be wary of costs relating to breaking your loan agreement early, which may be charged by some lenders and negate the benefit of refinancing in the first place.

Why do banks offer different interest rates to different people?

The interest rate a lender offers you is very much dependant on the risk the lender feels it’s taking by agreeing to loan you money.  It makes sense that if you have a good financial history of paying back the money you owe on time, you present a lower risk as a borrower and will therefore be offered a lower interest rate.  This is why it’s very important to approach your proposed lender with as good a credit score and as strong a financial position as possible.

Does the schedule I choose affect the cost of my home loan?

It can – many Australians choose to reduce the interest they pay by switching to a weekly or fortnightly repayment schedule rather than making monthly loan repayments.   Paying the minimum each fortnight is likely to save you several hundred dollars in itself, which isn’t overly significant over the course of your home loan, but rounding up your fortnightly payments to equal half of the expected monthly contribution will save you thousands, if not more.

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