How do low-interest loans work?

How are low-interest loans in Australia calculated?

Each lender sets its own interest rates; however, they're all guided by the monthly Reserve Bank of Australia's (RBA) cash rate decision. The RBA cash rate is one of the crucial factors determining the interest rate charged to lenders when they borrow funds which they then use to lend to you. This is why the cash rate impacts the interest rates offered by lenders.

The RBA cash rate isn't the only thing that impacts interest rates. Lenders will also work into their calculations other funding costs, as well as their own overhead costs and costs of servicing you as a customer. This is why you'll often find the lowest mortgage interest rates come from online lenders like Yard, as they don't have branches, so they have less overhead or running costs.

What should you consider about a low-interest loan?

Low-interest loans are very attractive, but you still need to consider the whole home loan product, not just the rate, when deciding if it's right for you. However, there are a few things you should consider when looking at low-interest loans.

• Features: Does the mortgage have the features you're looking for in a home loan, like an offset account or redraw facility? Perhaps an alternate loan with a slightly higher interest rate does and therefore is a better option for you.
• Fees and charges: What are the fees and charges that come with the loan? If there are substantial upfront or especially ongoing fees like package fees for features you won't even use, then it may not be smart to choose that loan.
• Loan amount: Will the lender offer you a loan amount that matches your budget and the additional costs of purchasing your property? Each lender has its own lending criteria. Depending on your circumstances, you may get a different loan amount from other lenders. For instance, Lender A may have the lowest interest rate and the loan features you want but require more of a deposit and won't lend you as much as you need. Whereas Lender B has a slightly higher interest rate but still has all the loan features you want and is willing to offer you a larger loan amount. You may even have the option to contribute even less of a deposit and pay Lenders Mortgage Insurance, which Lender A wasn't even offering.

When opting for a low-interest loan may not work for you.

As attractive as a low-interest loan is, there are some circumstances where you may not want to jump on the lowest mortgage interest rate in the market.

• You're purchasing an investment property.: If you're buying your property for investment purposes, you'll need to get an investment home loan which often has higher mortgage rates. You can also claim the interest you're charged on this loan as a tax deduction, so you may not be concerned with finding the lowest interest rate.
• You're still in a fixed term: If you already have a mortgage and think you should refinance to a low-interest loan but are still in your fixed term, you should be aware of the costs to break that fixed term. Fixed-rate mortgages all have break costs charged when you refinance or repay the loan before the fixed period ends, and they're often relatively high. Depending on these costs, it may be better to wait until the fixed term is over and then find a new low-interest loan in Australia.
  

How to find a low-interest loan in Australia?

The crucial part of finding a low-interest loan in Australia is making sure that you're comparing like for like. For example, don't compare a fixed-rate loan with a variable rate loan as they aren't the same loan type, so they are unlikely to have exactly the same rate. The same goes for looking at owner-occupier rates and investor rates. You need to make sure when looking for a competitive mortgage interest rate, you're comparing the same loan type.

You may find a lot of advice saying that working with a mortgage broker will help you get a low-interest loan in Australia, which may work for some. But mortgage brokers don't usually work with online lenders or smaller lenders with more competitive rates. Online lenders, in particular, have the benefit of minimal running costs or overheads. This means they can offer some of the most competitive mortgage rates and home loan features in the market. 

If you're on the hunt for a low-interest loan, make sure to check out Yard's range of mortgage interest rates.