Lowest home loan rates

Looking to save money on your home loan? Finding low interest home loans is one of the best ways to do it!

Lowest home loan rates

Getting the lowest home loan rates in Australia is well worth it. A home loan is the biggest financial commitment most Australians ever make. Finding low interest home loans either yourself or via using a broker can save you a LOT of money. 

How much difference does a low home loan rate make?

A lot.

It’s important to understand that home loans are usually for large sums of money. According to the Australian Bureau of Statistics, the average home loan in Australia is $500,000. It’s higher in some parts of Australia than others. In Sydney and Melbourne, the average mortgage is higher than $500,000.

Even a 1% difference in home loan interest rates can make a huge difference to your repayments. The table below shows just how much difference it makes to a $500,000 home loan over a 30-year term.

Interest rate Monthly repayment Total interest payable
3%
$2,108
$258,887
4%
$2,387
$359,348
5%
$2,684
$466,279

Note how much interest you have to pay over the life of your loan at each rate. It is more than $100,000 higher with each 1% interest rate increase! All those extra monthly repayments certainly add up. The benefits of low interest home loans are a no-brainer.

What happens to my home loan when interest rates rise?

That depends on whether you have a fixed or variable home loan rate.

If you have a fixed rate, it won’t change even if market rates change. It will stay the same for the fixed rate period. This is usually between one and five years, depending on the terms and conditions of your loan. This means that your repayments will also stay the same during this period even if market rates rise.

On the other hand, if you have a variable rate, it will move in line with market rates. So if those rates rise, so will your variable home loan rate. This means your repayments will increase as well. The table below shows the difference a rise in interest rates of 0.5% has on a $500,000 home loan over a 30-year term.

Interest rate Monthly repayment
3%
$2,108
3.5%
$2,245

As you can see, your monthly repayments would increase by $137. That may not sound like much, but it means you’ll pay nearly $50,000 more over the life of your loan.

Are fixed or variable rates the lowest home loan rates?

There is no definitive answer to that question. It depends on what lenders believe market rates will do in the future. Unfortunately, no one has a crystal ball to accurately predict that. Fixed rates are often higher than variable rates for that reason.

Lenders are risk-averse. It would be costly for a lender to lock you into a fixed rate if market rates rise. It would be great for you though because you’d be charged less interest and your repayments wouldn’t increase!

However, there will be times when principle and interest fixed rates in the market are lower than variable rates. If lenders genuinely believe that rates will fall, fixed rates may be lower. On the flip side, if lenders believe rates will rise, fixed rates will be higher.

It’s important to shop around to find low interest home loans. Lenders in Australia compete aggressively for home loan business because it is a lucrative, long-term market.

What factors affect home loan interest rates?

Several factors affect home loan interest rates, including:

  • Official movements in the Reserve Bank’s cash rate.

If this rate rises or falls, home loans may also rise or fall accordingly. The Reserve Bank Board reviews the cash rate every month.

  • Economic conditions.

Reserve Bank cash rate decisions are influenced by the general state of the economy. For example, the Reserve Bank Board may decide to lower interest rates to encourage borrowing to stimulate consumer demand. This can help to lower unemployment.

On the other hand, if the Reserve Bank is worried about inflation, it may increase interest rates.

  • The purpose of the home loan.

Owner-occupied home loans have a lower rate than investment property loans. That’s because lenders perceive investment property loans as being higher risk.

  • Your perceived credit risk to the lender.

When you apply for a home loan, a lender will make an assessment of your credit risk. In other words, the risk of you not making your home loan repayments.

The lower your credit risk, the lower interest rate you’ll likely be offered (and vice versa). You will be perceived as higher risk if you have a bad credit score, a low deposit, or both.

How do you compare different products to get the lowest home loan rates?

Make sure you use the comparison interest rate when comparing different loan products. This is the higher of two interest rates that will be advertised on a loan. It includes the cost of all loan fees as well as the interest rate. The lower interest rate on the other hand is just the cost of interest.

One home loan can have a lower nominal interest rate than another, but still cost more overall. This will be reflected in its higher comparison rate. Lenders in Australia must advertise the comparison rate on their products to comply with consumer protection legislation.

It’s also important to compare optional home loan features that may be available to you. These usually come at an additional cost. Make sure you won’t be paying for any optional features unless you’re going to get enough benefit from them. For example, offset accounts or redraw facilities.

An offset account will only significantly reduce your home loan  interest if you have a high balance in it. A redraw facility also costs money. It can offer you flexibility, but if you use it, you won’t pay your loan off as quickly as possible.

Do a cost/benefit analysis before you agree to pay for any optional home loan features.

How to get the lowest home loan rates

Here are simple steps to follow to get low interest home loans.

What else you need to know about getting the lowest home loan rates

Still have more questions? Here are answers to other FAQs we get here at Savvy about low interest home loans.

Which bank has the lowest home loan rates?

The market is highly competitive among a range of banks, building societies and credit unions. Rates can change daily so it’s always best to check to get the latest information.

Are honeymoon rates low interest home loans?

A honeymoon rate is a low introductory rate that some lenders offer on their home loan products. It usually lasts for 6 or 12 months. The rate then usually reverts to the lender’s standard home loan rate.

It’s important to consider that standard rate when making your home loan decision, not just the temporary honeymoon rate. A home loan is often a 25 or 30-year commitment.

What is a split loan?

A split loan has part of the amount borrowed at a fixed rate and the remainder at a variable rate. You can usually choose the proportions to split. It allows you to hedge your bets between market interest rate movements.

If rates rise, the fixed portion of your loan is protected. If rates fall, the variable portion of your loan (and your repayments) will also fall.

Can I switch between a fixed and variable rate home loan?

Yes.

However, you’re likely to be charged fees if you switch from a fixed rate home loan to variable.

How much is a good credit score?

Different credit reporting agencies have different scoring systems.  For example, any score above 670 is considered to be a good credit score with Equifax.

However, an Equifax credit score lower than 670 could affect your ability to get a loan approved. Even if you are approved, you will most likely be charged a higher interest rate.

Should I refinance to get the lowest home loan rates?

This depends on your individual financial situation as well as the costs/benefits involved.  If the benefits outweigh the costs, refinancing can be a smart move.

You should look at your refinancing options every few years to make sure you’re getting the best deal you can. You should also re-evaluate your home loan whenever your situation or market conditions change significantly.

What’s the difference between a ‘principal and interest’ and an ‘interest-only’ loan?

A ‘principal and interest’ loan requires you to pay back the amount you borrow plus interest. An interest-only loan on the other hand only requires you to pay interest. The repayments on an interest-only loan are therefore lower.

Interest-only loans are usually only available for periods between 1 and 5 years. After that, the loan reverts to higher ‘principal and interest’ repayments. If you take out an interest-only loan, it’s important to factor in your eventual higher repayments.