Compare home loans for December

Why understanding home loan rates matters  

Small interest rate differences can amount to huge savings over time.

The graph below illustrates how lower rates can translate to interest savings, using the example of an $800,000 mortgage, with a 25-year term. 

At 6.50% p.a., you would end up paying $820,497 in interest alone. In other words, you'd pay back your principal loan amount of $800,000 and pay an additional $820,497 in interest – that's over $1.6 million all up. 

Comparing the 6.00% and 6.50% interest rate examples above, a difference of just 0.50% could save you almost $250 per month, or over $74,000 over the span of 25 years.

Big Four vs alternative lenders

In Australia, home loans are available from a wide range of lenders including the Big Four, customer-owned banks, credit unions and non-bank lenders.

The Big Four banks (ANZ, CommBank, NAB, and Westpac) however dominate the home loan market. Despite their popularity, Big Four home loans tend to have higher rates than the competition.

Compared to the average variable rate in the Mozo database, a borrower with an $800,000 home loan could spend an extra $225 per month, or over $67,000 over 25 years with a Big Four, as illustrated below. This is why it’s important to shop around and compare home loans before you commit to any one lender. 

The RBA’s relationship with home loan rates 

There are several factors that influence home loan rates in Australia. Competition between lenders and inflation are among the culprits, but recently the biggest influence on interest rates has come from the Reserve Bank of Australia (RBA). 

To control inflation, the RBA manipulates the cash rate. When the cash rate is raised, interest rates tend to increase in response. This usually results in less spending by consumers and the eventual easing of inflation. 

Over the past few years, the RBA cash rate has increased by 4.25% and this has pushed up interest rates on home loans as banks and lenders responded. 

In April 2022, the cash rate was at just 0.10%, and the average variable home loan was 3.03% p.a. By November 2023, the cash rate had risen to 4.35%. 

While the RBA hasn’t raised rates since then, the average variable rate has doubled which has put a lot of pressure on mortgage holders. As at 1 December 2024, the average variable home loan rate is now 6.74% p.a. according to the Mozo Database (based on OO, P&I, $400k, <80% LVR loan).

What is a home loan?

A home loan is an amount of money that you borrow to finance the purchase of a property.

How do home loans work?

A home loan works in a similar way to any other loan. You borrow an amount of money to fund the purchase of a property or land and you pay that money back (principal), plus interest, over a period of time.  

There are a range of different factors that determine the repayment amount.

1. Loan term. In Australia the typical loan term for a mortgage is 25 to 30 years but you can have a loan term for less than this.  
2. Interest rates: borrowers have a choice between fixed and variable interest rates for home loans or a split home loan where a portion of the loan is fixed and the other portion is variable. Fixed rate loans are usually available for terms between 1-5 years.   
3. Repayment frequency. The standard home loan repayment is made monthly, but many lenders also offer weekly and fortnightly options.   
4. Type of repayment. For owner occupier home loans the standard repayment type is principal and interest (P&I). There is also an interest-only (IO) repayment structure, where you only pay back the interest you are charged. This is a popular option for investment loans.  

What are the different types of home loans in Australia?

There are two types of home loans: owner-occupied and investment home loans. 

• Owner-occupied home loans are for borrowers who intend to live in the home they are buying (in other words, a property occupied by the owner). 
• Investment home loans are tailored towards property investors who intend to rent out the properties they purchase to tenants. 

How much can I borrow for a home loan? 

How much a home loan lender lets you borrow will depend on several factors, including: 

• Your deposit size (typically 20% of the purchase price)
• Your loan-to-value ratio (the difference between your loan size and the property’s value)
• Your borrowing power (how much you can borrow, based on your income) 
• Your credit score (a rating of how creditworthy you are)
• Your home loan serviceability (your ability to pay for, or ‘service’, a home loan). 

You can use a borrowing power calculator to estimate the amount of money a lender may let you borrow based on your income, your expenses, and other debts you might have. 

How to compare home loans 

Using a home loan comparison service like Mozo means you can compare a wide variety of options quickly, easily, and for free. 

When you compare home loans, ask yourself the following questions: 

• Is this interest rate competitive or are there comparable loans with a lower rate?
• Do I want to fix my interest rate or am I comfortable with a variable rate? 
• Does this loan charge higher fees than the others on my shortlist? 
• Is there a monthly fee to use certain features of this home loan (e.g. an offset account)? 
• Am I getting the features I want with this home loan? 
• Do I meet the eligibility requirements to get this loan, including minimum deposit or LVR restrictions? 

These questions can help point you in the right direction and make it easier for you to decide on the right home loan for you.