Understanding home loan rates in Australia

What are the different types of home loan interest rates?

There are multiple home loan rate types available on Australian mortgages. They each have their pros and cons, depending on what you're looking for in a home loan rate.

Variable interest rate

A variable interest rate will be advertised at a set percentage rate per annum but may change depending on the market. Your lender is required to give you reasonable notice of any changes to your home loan rate. 

Pros of a variable rate loan

• You can save money on interest if your home loan rate decreases.
• There are no break, exit or early repayment fees if you find a better home loan rate elsewhere and refinance your mortgage.
• You can often access more features such as offset accounts, redraw facilities or fee-free extra repayments. 

Cons of a variable rate loan

• If the market changes, your home loan rate may increase, increasing your repayments and the total interest you pay on your home loan.
• It makes it harder to create an accurate long term budget because your home loan rate can increase or decrease at any time.
• The extra home loan features available may come with additional fees for your loan.

Fixed interest rate

As the name suggests, a fixed interest rate means just that your home loan rate is fixed for a period at least. The fixed home loan rate is generally only fixed for a period of one to five years, with your home loan rate reverting to a variable rate at the end of the fixed period.

Pros of a fixed-rate loan

• You can easily budget for your mortgage repayments for the period you have a fixed home loan rate.
• You’re protected against your repayments increasing if there is a shift in the market that increases home loan rates.

Cons of a fixed-rate loan

• You may miss out on interest rate savings if the market shifts and home loan rates decrease. 
• You'll may be charged fees for making additional repayments or if you want to repay or refinance your home loan before the fixed period ends. The latter of which can be in the thousands.
• You're unlikely to have access to features like offset accounts or redraw facilities.

Split home loans

A split home loan is a great way to get the best of both worlds. It allows you to have a portion of your home loan under a fixed home loan rate and the rest under a variable home loan rate. To help give you some peace of mind, you could fix 70% of your loan amount. You can then benefit from the possible savings and additional features with a variable home loan rate on the remaining 30%. 

What are the repayment types available on home loans?

Something else that may impact your home loan rate is the repayment type you choose for your home loan. 

Principal and interest repayments

Principal and interest repayment home loans are the most common type of home loan in Australia. Your repayments include a portion of the principal, the total amount you borrowed from the lender, and the interest charged on this loan amount.

Pros of a principal and interest home loan

• Principal and interest home loans often have the best home loan rates.
• You'll be paying down the debt you owe the lender whilst also paying the interest charged.
• You'll pay less interest over the life of your loan due to repaying a portion of the principal each month.
• You're building up equity in your property when you repay the principal, which you can access later through refinancing.

Cons of a principal and interest home loan

• Your monthly mortgage repayments will be larger as you're paying both the principal and the interest.
• You'll have lower cash flow due to higher monthly repayments.
  

Interest-only repayments

Interest-only repayments are when your mortgage repayments only include the interest charged on your home loan. Interest-only home loans are most popular amongst property investors.

Pros of an interest-only home loan

• Lower monthly repayments mean you have more cash to play with each month to repay other debts or for general living expenses.
• There are often tax benefits for investors who take out an interest-only mortgage.
• It may be helpful for short term finance when buying a new property or renovating.

Cons of an interest-only home loan

• You're not repaying the principal, which means you're left with debt for longer and aren't building up equity in your property. 
• Interest-only repayments are for a set period, typically between one to five years. After which repayments revert to principal and interest. This means your repayments will increase, often substantially, when the interest-only period ends.
• They can often have higher home loan rates.

What are some other factors that impact home loan interest rates?

There may be other factors that impact your home loan rates or the amount of your home loan repayments. These include the type of borrower you are, the amount you borrow and the loan term.

Owner-occupier vs investor

The type of borrower you are will likely impact the home loan interest rates a lender offers you. A lender typically charges a higher home loan interest rate for investor loans.

Loan-to-value ratio (LVR)

The loan-to-value ratio (LVR) is the percentage of the property's value that you're borrowing from the lender. Some lenders will offer a more competitive home loan interest rate on loans with a lower LVR. As the LVR increases, the home loan rate may increase.  

Loan term

The loan term is the length of time you agree to repay the loan amount to your lender. It won't impact your home loan rate, but it is used in calculating the interest you pay each month. This means it will affect your monthly repayments and the total amount of interest you pay on your home loan.

The longer the loan term, the lower your monthly repayments, but the more interest you'll pay over the life of your loan. A shorter loan term will increase your monthly home loan repayments but means you’ll save on the interest you'll be paying in the long term. You can use our mortgage repayment calculator to estimate how your repayments change based on different loan terms.

How is home loan interest calculated?

Lenders will typically calculate home loan interest daily and charge it monthly. At the end of each day, a lender will divide the remaining loan amount by 365 (some lenders will change this to 366 in leap years) and multiply that amount by your home loan rate. Then each month, when your repayment is due, they'll add all of the interest calculations together to calculate how much interest you owe for that month.

Home loan interest rates versus the comparison rate

When looking at home loan rates, you'll likely see that there are two interest rates for each home loan. The first is the home loan interest rate, and the second is the comparison rate.

The home loan interest rate is the annual rate of interest you'll be charged on the loan amount. The comparison rate incorporates the home loan interest rate and any upfront or ongoing fees or charges. 

Lenders will typically put in the fine print that the comparison rate is calculated based on a loan amount of $150,000 over a 25-year term or similar. Therefore the actual comparison rate you pay on your home loan will differ from the one advertised depending on the size of your loan and your loan term.

Understanding loan fees

Most home loans will come with a range of fees; even the lowest fee loan will likely still have some fees. These fees can include:

• Application fee - This is charged for the preparation of documents for your home loan. Yard charges no application fee on any of its home loans.
• Valuation fee - Your lender will do a valuation of the property you wish to hold as security for your home loan, and they may charge a fee for this.
• Settlement fee - This is charged to finalise your home loan and settle your property purchase.
• Legal fee - Your lender will likely need to prepare some legal documentation when organising your home loan and will charge you a fee for doing so.
• Offset account fee - If you have an offset account, it may come with an ongoing account keeping fee.
• Discharge fee - To discharge or release your mortgage, the lender will need to do some work on your behalf to complete this process and charge you a fee for this work.
• Early repayment or break fee - If you have a fixed rate home loan and want to refinance or repay your loan in full, your lender will charge this fee or similar.

Using a mortgage broker vs going directly to a lender

The information available about home loans may get overwhelming. It may make the idea of using a mortgage broker extremely attractive as they do all the leg work of comparing different loans. But mortgage brokers work with a select panel of lenders and may miss out on some of the best home loan rates. With the growth of the home loan market in Australia, you'll find that you can often find the best home loan rates online just by doing a little research. 

Online lenders like Yard don't have the overhead of physical branches, which means they can often offer some of the best home loan rates in the market. You can check out Yard's range of home loans here.