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Home loan interest rates: December 2020

By Peter Marshall ·


Last month, the Reserve Bank lowered the cash rate from 0.25% to 0.1%. Most banks responded in much the same way they did following the previous cut -- by reducing fixed rates and leaving variable rates unchanged. The big banks led the charge, shedding as many as 100 basis points and bringing 4-year rates in particular to new lows.

At the time of writing, the average 2-year fixed rate in our database sits at 2.35% p.a. Tic:Toc leads on 1-year terms with rates as low as 1.89% p.a. (2.18% p.a. comparison rate*). Meanwhile, QBank offers 1.89% p.a. (3.37% p.a. comparison rate*) on 3-year terms, and Bank of Melbourne and St. George offer 1.94% p.a. (3.21% p.a. comparison rate*) on 4-year terms.

The average variable rate is a bit higher at 3.31% p.a. The current rate leader for owner occupier loans is Reduce Home Loans, which offers a 1.99% p.a. variable rate (2.05% p.a. comparison rate*), while the best value investor loan is from Tic:Toc, which offers 2.33% p.a. (2.34% p.a. comparison rate*).

To find out how interest rates are tracking in other banking products for December, check out our snapshot for Savings Accounts Interest Rates and Term Deposit Interest Rates.

Picture of Peter Marshall
Peter Marshall
Banking expert

Peter has been working in the Australian banking and finance industry for over 20 years and oversees Mozo’s extensive product database. He is regularly sought out for his expert commentary and analysis on banking and interest rates trends by print, radio and TV media.

Latest home loan interest rates on Mozo - last updated December 02, 2020

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  • 1.99% p.a.variable for 12 months and then 2.48% p.a. variable

    2.47% p.a.

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  • mozo-experts-choice-2020

    2.19% p.a. variable

    2.19% p.a.

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  • mozo-experts-choice-2020

    1.95% p.a.
    fixed 3 years

    2.27% p.a.

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  • 2.04% p.a.
    fixed 3 years

    2.73% p.a.

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  • 1.89% p.a.
    fixed 2 years

    2.94% p.a.

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  • 2.59% p.a. variable

    2.76% p.a.

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  • mozo-experts-choice-2020

    2.34% p.a. variable

    2.34% p.a.

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  • mozo-experts-choice-2020

    2.48% p.a. variable

    2.50% p.a.

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  • 2.54% p.a. variable

    2.55% p.a.

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  • 2.59% p.a. variable

    2.63% p.a.

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  • mozo-experts-choice-2020

    2.09% p.a.
    fixed 2 years

    2.98% p.a.

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  • mozo-experts-choice-2020

    2.84% p.a. variable

    2.44% p.a.

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  • mozo-experts-choice-2020

    2.54% p.a. variable

    2.54% p.a.

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  • mozo-experts-choice-2020

    2.59% p.a. variable

    2.60% p.a.

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  • mozo-experts-choice-2020

    2.24% p.a. variable

    2.21% p.a.

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    Details

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Home loan interest rates resources

Views, news, tips and guides to help find the home loan for you.

How are home loan interest rates calculated?

Interest rates are set by the Reserve Bank of Australia (RBA). The RBA meets on the first Tuesday of every month to announce whether the official cash rate will stay the same, increase or decrease, based on things like inflation, employment, economic growth and how much people are spending. The idea is that higher rates will slow borrowing and therefore economic activity and inflation and lower rates will do the opposite.

Lenders will then set their own home loan interest rates based on the RBA’s decision.

Types of home loan interest rates

The type of interest rate you pay on your home loan can affect how much you pay overall and each month. There are pros and cons to each type, so it’s important to take the time to find out which will suit you best. Your options include:

  • Fixed rate

A fixed home loan interest rate locks in your repayment amount at a certain value and will remain the same for a set time, usually up to 5 years. This makes budgeting easier, as you’ll have a set amount that you need to pay each month that won’t be affected by rate increases. 

The downside, however, is that if rates decrease while you’re on fixed term interest, you won’t reap any of the benefits. When your fixed term ends, you have the option to either enter into a new fixed rate or switch to variable rates.
In general, fixed interest rate loans are less flexible than other types of mortgage rates, and you could end up paying penalties if you repay the loan early.

  • Variable rate

A variable home loan interest rate means that your repayments might change at any time, based on changes to the cash rate or the whims of your bank. There’s less security in this type of interest rate - your repayments are subject to rises and falls in the market. 

However, it’s a popular type of home loan in Australia, as variable rates often sit lower than fixed rates. A variable interest rate might suit you if you're looking for flexibility, as you’ll have the option to make extra repayments and pay off your loan quicker.

  • Comparison rate

It can be hard to compare home loan rates sometimes. Aside from the interest rate, there might be extra fees and charges built into your home loan, which means the lowest headline interest rate might not always the best option. That’s where the comparison rate comes in.

The National Credit Code requires that lenders show comparison rates - which factor in interest, fees and charges - to give you a clearer idea of the true cost of a loan. So when you compare home loan interest rates on Mozo, you’ll see an interest rate plus a comparison rate for each product.

What is a comparison rate?

Keep in mind that comparison rates are a guide based on a secured loan of $150,000 over 25 years, with monthly principal and interest repayments. Different values or time frames on loans will mean different comparison rates. So while the comparison rates on our site are useful for choosing the best value home loan, to find out exactly how much interest you’ll be paying you'll need to check with your lender.

How are my home loan interest repayments calculated?

How much you pay each month will depend on numerous factors, including what type of rate you’re paying, how often your interest is calculated and how long your home loan term is for. One of the important factors in determining how your interest rates are calculated is whether your home loan is an interest only or principal and interest loan. Here’s the difference:

  • Interest only loans

With an interest only loan your monthly repayment consists of only the interest for the loan, and not the loan amount itself. The monthly savings can be significant if you’re not paying any of the principal loan amount, which might be a great short term solution if you’re running on a tight budget. The downside is that you won’t be making any progress toward actually owning your home.

Interest only loans are popular for investors, because they’re often counting on the value of the home increasing enough to sell the property, pay off the loan and make a profit.

Remember that you will eventually have to pay off the total loan amount, so while an interest only loan might be affordable in the short term, you should have a long term repayment plan in place.

  • Principal and interest loans

With a principal and interest loan, you’re paying interest, plus a part of the total loan amount each month. At the beginning of the loan, most of your repayment will go toward paying interest and a little will go toward the loan amount. As the principal amount gets lower, so does the interest you need to pay on it, so eventually, most of your monthly repayment will be going towards the principal, while a little goes to interest.

While you’ll be paying more each month than you would with an interest only loan, the good news is that by the end of your loan term, you’ll own your home entirely.
You can use Mozo’s home loan repayments calculator to see not only how much your monthly repayments would be with either an interest only or principal and interest home loan, but also how much total interest you would pay with each one.


Picture of Peter Marshall
Peter Marshall
Banking expert

Peter Marshall has been working in the Australian banking and finance industry for over 20 years and oversees Mozo’s extensive product database. He is regularly sought out for his expert commentary and analysis on banking and interest rates trends by print, radio and TV media.

FAQs about home loan interest rates

Got more questions about home loans? We’ve got answers. Below, we run through some key bits of info to help you understand home loan interest rates, and put you on the right track to find a home loan that suits you.

What is the comparison rate?

The comparison rate is designed to give you an accurate picture of how much each home loan might cost you by taking into account fees and any other extra charges, so don’t forget to use it.

What additional home loan features are there?

You have to weigh up the benefits and disadvantages to having extra features on your home loan. While some extras like an offset account, free extra repayments and repayment flexibility can save you money, others may not be so helpful and you generally pay a higher premium for a full features home loan. Take a careful look at the features being offered and decide if they are worth the extra cost. If you’re not sure exactly which feature might benefit you, check out Mozo’s guide to home loan features in a nutshell.

When is the interest calculated on my home loan?

Your interest might be calculated daily, monthly, quarterly or annually. Daily interest is best because it’s calculated as your principal loan reduces, and so you’ll pay less interest all up.  Annual interest, on the other hand, is calculated each day, but based on a yearly principal, which means it takes a whole year before you’ll pay less interest. If you’re on anything other than daily interest, try to time your monthly repayments to be before your interest is calculated, so you’ll be paying interest on the lowest principal possible.

Are home loan rates negotiable?

Banks don’t necessarily advertise the fact, but it is possible to negotiate a cheaper home loan rate. Success rates will vary depending on the specifics of the loan, but it’s always worth approaching your lender to see if they’ll budge. 

How can I reduce the amount of interest I pay?

The main goal for your home loan should be to pay as little interest as possible while remaining realistic about what monthly repayments you can afford to make. Here are a few tips and tricks to help you reduce the amount of interest you pay on your home loan:

  • Pay off your loan as quickly as possible. The quicker you can get rid of your loan, the less interest you will pay. But be careful, as sometimes, particularly with fixed term interest rates, you may be charged extra fees or penalties for paying off your loan before the complete term is finished.
  • Switch to a shorter term. If your lender allows it, you may want to look at a shorter loan term. This would mean you’ll pay more each month, so be sure to check your budget before going ahead, but it will save you money overall. So, say you had a loan of $150,000, at an interest rate of 3.98%. On a 25 year term, you’d pay $790 each month and a total of $87,030 in fees and interest. If you reduced that to a 20 year term, your monthly payments would increase to $907, but all up, you’d only pay $67,774.
  • Take advantage of free extra repayments. Again, you’ll need to check that there are no fees or penalties for overpaying, but this can be an effective way to quickly reduce your principal, and therefore pay less interest. If you’re budget allows for it, you can pay extra in lump sums or added to your monthly repayments to pay off your loan faster.
  • Use an offset account. An offset account is a bank account attached to your home loan. The balance you keep in this account is offset against the principal of your home loan to help you reduce the amount of interest you will pay. For example, if you had a home loan of $400,000 and $20,000 in your offset account, you’d only be paying interest on $380,000 of your loan. Think about getting your salary put into your offset account to get the most out of this feature.

How do I find the best home loan interest rate?

There are heaps of competitive home loan interest rates available and it’s worth the time to do some research and find a rate that suits your budget and lifestyle. To get you started, check out these great tools at Mozo:

  • Home loans comparison page - find out what home loan rates are currently on offer from hundreds of Australian financial institutes, from the big banks down to small online lenders and credit unions.
  • Home loans calculators - crunch the numbers on your home loan and find the answer to questions like ‘How will rate changes affect my repayments?’ and ‘How much can I afford to borrow?’
  • Home loan guides - we’ve got a guide on all the trickiest parts of home loans to help you through the process, all the way from deposits to refinancing.

You can also check out our handy interest rate guides for information on how interest rates work and help calculating what interest you'll pay on your home loan.