Mortgage Rates

How to find the best mortgage for you

Whether you’re a young Australian entering the property market for the first time, an investor looking for their next opportunity, or a family on the hunt for a cheaper mortgage to cut down their repayments, it’s always important to compare a range of deals to find one that’s best suited to you. But to narrow down your search, a great first step to take is to figure out what kind of borrower you are. 

What kind of borrower am I? 

Are you a first home buyer, or are you looking to switch to a better deal? As a first home buyer you may want a deal that comes with a lower deposit requirement on top of the cheapest mortgage rate you can get, whereas if you’re refinancing, you may be on the lookout for a low rate deal which also offers features that can help you save - such as an offset account or the potential to make free extra repayments. 

Meanwhile, for property investors, a key consideration might be whether to opt for an interest only mortgage, or principal and interest. On the one hand, interest only investment loans could save you money and increase your cash flow in the short term: 

• During the interest only period, you can look forward to smaller monthly repayments since you aren’t repaying the amount you’ve borrowed (i.e. the principal).
• Interest only mortgages could help to reduce your annual tax bill, as the interest paid on your investment property is tax deductible. 

But on the other hand, interest only loans generally cost you more in the long run: 

• Because you’ve held off on principal repayments during the interest only period, be prepared for significantly higher repayments once your mortgage reverts back to principal and interest. 
• Getting a late start on your principal repayments also means it could take you considerably longer to pay off your mortgage. As such, you’ll be charged more interest over the life of the loan. 

Which type of mortgage interest rate is right for me? 

Now that you’ve figured out what kind of borrower you are, the next step is determining which type of mortgage rate fits your situation, as each comes with its own set of pros and cons.

The type of rate you go with influences how you’ll make your repayments - fixed rate loans have more structure, so you can expect to repay the same amount every month, while variable rate loans offer a lot more flexibility, including the ability to make additional repayments which can lower the total interest you pay over the life of the loan. 

Variable interest rate

The most common type of mortgage in Australia, variable rate mortgages are typically dictated by the movement of the official RBA cash rate, though it’s not uncommon for banks to move their rates out of cycle.

A variable rate mortgage could be a great option for borrowers who like the idea of flexibility in terms of being able to make extra repayments, or in the potential to make lower repayments if rates go down. Obviously a mortgage rate drop is great news for borrowers with a variable loan, but there’s always the possibility they will go up - meaning you’d need to pay more. That’s why it’s important to factor in the possibility of a rate rise before you borrow, or stash away savings to act as a buffer.

Fixed interest rate

A fixed rate mortgage provides borrowers with absolute certainty when it comes to making repayments, as the rate is (no surprises) “fixed” for a set period of time - usually between 1-5 years. On the plus side this could mean that you’re insulated from mortgage rate rises over that period, though it also means you could miss out on making lower repayments if they fall.

Once the fixed period is over, borrowers will have the option of fixing again for another set period, or switching to a variable rate mortgage.

Just bear in mind that you might not have access to all of the features you would with a variable rate offer should you opt for a fixed rate mortgage, and they also tend to come with higher rates.

Split interest rate

One option you might not be aware of as a borrower is your potential to split your mortgage. While not every lender will offer you this possibility, if they do you’ll be able to pay off part of the amount you borrow at a fixed rate while leaving the other portion on a variable rate. This means borrowers can make the most of the flexibility and features of a variable loan and the repayment certainty of a fixed rate.

Taking out a mortgage is a massive financial commitment for many Aussies, so it makes sense to want to find a mortgage rate that’s the right fit for you. And since there are a few mortgage rate options around to choose from, it can be tricky to know how they compare. That’s where our Mortgage Interest Rates page comes in - it can help you compare some of the available interest rates around, as well as fees and mortgage features. Easy as.

How much will I be able to borrow? 

Speaking of repayments, it’s always a good idea to see just how much you can afford to borrow before you start comparing mortgages, as borrowers able to make principal and interest repayments will generally be able to snag cheaper rates than borrowers who make interest-only repayments. 

There are a number of factors that go into the size of the loan you’ll be able to borrow from your lender, including: 

• Your income: Lenders want to know how much money you have access to. 
• Your employment situation: If you’re self-employed or a casual or contract worker, lenders will likely think of you as higher risk since your job is more unstable, and therefore you’d have less borrowing power than a full-time worker. 
• Your expenses: Lenders also want to keep a close eye on your household spending, such as electricity and phone bills, grocery costs and childcare.
• Your debt: Got any credit cards, personal loans or car loans? The more debt you have hanging over your head, the lower your borrowing power will be, since you’re seen as less able to repay your mortgage.

But one of the biggest factors that affects your borrowing power is the actual deposit you can put down. In Australia the general preference among lenders is to keep your LVR (Loan to Value Ratio) under 80%, which means you’ll be required to save up at least a 20% deposit. However, some mortgage providers do offer loans with LVRs of up to 95% (a 5% deposit), though you’ll generally have to take out Lenders Mortgage Insurance (LMI) if you can’t come up with a 20% deposit.

Lenders also set minimum and maximum loan amounts which could impact the amount you’re able to borrow and the mortgage rate you’re offered, with values typically ranging anywhere from tens of thousands to millions of dollars.

Want to see just how much you’ll be able to borrow? Wonder no more by plugging your details into the Mozo home loans borrowing calculator.

How can I pay off my mortgage sooner? 

If you’re eager to free yourself from your mortgage sooner rather than later, a variable rate mortgage could be a better fit. That’s because you have access to more flexible repayment options and can also refinance whenever you’d like without having to worry about break costs or exit fees (that may apply to fixed rate mortgages). 

Here are some savvy tips for repaying your mortgage faster: 

• Make more frequent repayments: That’s right! Just by opting for fortnightly instead of monthly repayments, you can shave quite a few years off your mortgage term. That’s because when you pay per fortnight, you’re increasing your payments over one year from 12 to 26. In other words, if you switched your repayments from $2,000 a month to $1,000 a fortnight, you’d be paying off $26,000 over 12 months, as opposed to $24,000 - that’s $2,000, or an entire month, more than the monthly option!
• Make extra repayments: Many variable rate mortgages offer free extra repayments, and this is a handy feature if you want to save on interest in the long run. Even a small amount - say, an extra $100 every fortnight - can make a big difference; for a $500,000 mortgage with a rate of 3.5% over 25 years, you would save $33,129 in total interest and cut down your mortgage term by 3 years. 
• Use a mortgage offset account: Imagine an account that lets you store your savings while also offering the perk of reducing your interest costs and mortgage term. Well, that’s what an offset account is! So if you have a $500,000 mortgage and you put $20,000 inside your offset account, then you only have to pay interest on $480,000 of your home loan. Just keep in mind that if you do withdraw money from your offset account, the amount you’ll be charged interest on will go back up again.
• Give your mortgage a health check every few years: Doing a health check means shopping around and keeping your eye out for better deals even after you’ve taken out a mortgage. With lenders constantly changing their deals, this is a good way to make sure you stay on a competitive rate over the life of your loan. You could cut down your loan term significantly just by switching to a better rate and keeping your repayments the same as before. 

Written by: Kelly Emmerton, Mozo’s Money Editor 

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