Compare home loan interest rates

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Top tips for interpreting the interest rate

When it comes to home loan interest rates, the advertised interest rate is what a lot of consumers will look at first and foremost – but it’s not the be-all and end-all of what a home loan can offer you! This is why it’s crucial to understand how interest rates work before looking for a home loan.

Home loan interest rates

Confused by the different types of home loan interest rates? Let Selling Houses Australia host, Andrew Winter, explain the differences for you.

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What you need to know about home loan interest rates

What is a home loan interest rate?

A home loan’s interest rate is the rate at which you’re charged interest on the money you’ve borrowed via your home loan. These rates are expressed annually (per annum or p.a.), but interest will typically be calculated daily and charged monthly to your home loan.

Home loan interest rates can be either fixed, variable or a split between the two – none of these options are objectively better or worse than the other, but one may be more suited to your needs and circumstances.

How are mortgage interest rates calculated?

Lenders will typically calculate and set interest rates based on what it costs them to provide and maintain the home loan in question. This means that the interest charged on a home loan will typically cover the lender-side costs of the loan, plus a margin.

What is the RBA cash rate?

The cash rate is a number set by the Reserve Bank of Australia (RBA) which determines the interest payable on money borrowed and lent between lenders. The RBA sets the cash rate based on the current state of the Australian economy, including factors like recent economic growth, employment and inflation forecasts.

Strictly speaking, the cash rate only governs inter-lending borrowing, affecting the interest paid by lenders to other lenders on overnight loans taken out in the inter-lender money market. That being said, cash rate movements will usually have a direct impact on consumer-side interest rates, with a cash rate increase typically leading to higher interest rates across the board.

Why do mortgage interest rates rise?

Mortgage interest rates generally change in line with the cash rate. The cash rate determines how much it costs for lenders to borrow money from each other, so the higher the cash rate, the higher their costs and the more they charge consumers to cover those costs.

That being said, lenders can and do move advertised interest rates at their will – while the market tends to see more interest rate movement around cash rate changes, lenders do make what are known as ‘out of cycle’ interest rate changes, in which the change is not caused by or related to a change in the cash rate.

Who gets the extra money when interest rates rise?

Current interest rates rise when the cash rate does, because lenders are now having to pay more to borrow the funds they need to give their customers home loans. So, while they’re making more on their loans, they’re also spending more, meaning their profit margins haven’t shifted significantly.

How do I compare interest rates?

You can compare advertised interest rates in a number of different ways – both against each other (to see which ones are higher or lower) and against their attached comparison rates (to see how they stack up against the ‘true’ cost of the loan).

By comparing different advertised rates against each other, you can see which home loans would come with bigger or smaller regular repayments (assuming everything else is the same across the loan scenarios).

By comparing an advertised rate against its comparison rate, you can see whether the advertised rate is more or less than the ‘true’ cost of the loan, and subsequently assess for yourself whether it’s a good deal or not. You can also compare comparison rates against each other in the same way you can compare advertised rates, to see which products have comparatively high or low rates versus the competition.

What should I look for in a home loan beyond the interest rate?

The value you get from a home loan isn’t just driven by a low interest rate – it also comes from the features attached to the home loan. This could include an offset account, a redraw facility or the ability to choose and change your repayment frequency.

You should also take a home loan’s fees into account. Home loans may come with a range of upfront and ongoing fees, including application and account-keeping fees. Most home loans will come with fees of some sort, but comparing one set of fees against another may help you decide which home loans offer genuine value.

Stephen Zeller, General Manager

Meet our home loans expert,
Stephen Zeller

Stephen has more than 30 years of experience in the financial services industry and holds a Certificate IV in Finance and Mortgage Broking. He’s also a member of both the Australian and New Zealand Institute of Insurance and Finance (ANZIIF) and the Mortgage and Finance Association of Australia (MFAA).

Stephen leads our team of Home Loan Specialists, and reviews and contributes to Compare the Market’s banking-relating content to ensure it’s as helpful and empowering as possible for our readers.

Expert tips for decoding home loan interest rates

Our General Manager of Money, Stephen Zeller, has some tips to help you read between the lines when it comes to home loan interest rates:

Look beyond the interest rate

Don’t be fooled into thinking that the lowest interest rate is always your best option. You’ll want to consider any associated fees and charges that come with a home loan, as these additional costs can add up. Look for the comparison rate as a guide to helping you understand the true cost of the loan.

Think hard when it comes to variable vs. fixed rates

It can often be difficult to know whether a variable or fixed rate might be suitable for you. A fixed rate offers certainty regarding your repayments for the fixed term, whilst a variable rate can change your repayment at any time. There are pros and cons to each type of interest rate, so you need to understand their differences and weigh those up against your personal situation and needs.

Comparison is key, and we make it easy

There are literally hundreds of home loan products in the market, making it even more difficult to figure out which one might be suitable for you. Our online comparison tool shows you options that are relevant to your situation, making it a little easier to narrow down your options. However if you’re still unsure, you can get in touch with one of our Home Loan Specialists for guidance.

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