The right loan could cut years off your repayments. Mozo's home loan experts can help you.
Need info on the latest home loan and mortgage interest rates? Mozo tracks interest rates of hundreds of Australian home loan - including loans from the big 4 banks to the smallest of online lenders and credit unions. We track rates on fixed, variable, investment and refinancing mortgages so you can compare home loans quickly and easily. If you need to find the best home loan rates in Australia, Mozo has got you covered.
The comparison interest rate includes the interest rate, fees and charges into a single rate so that you can easily compare between mortgages. Current home loan interest rates can vary significantly between banks but the comparison interest rate is used to help borrowers compare the lowest rate home loans with ease.
Interest rates are set by the Reserve Bank of Australia (RBA). The RBA meets on the first Tuesday of every month to make an announcement on 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.
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:
A fixed 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 see the benefits of this. 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 rates, and you could end up paying penalties if you repay the loan early.
A variable interest rate means that your repayments might change according to the cash rate set by the RBA or if your bank decides to change your interest rate during your term. 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 way to take out a home loan in Australia, as variable rates are often lower than fixed. A variable interest rate might suit you if you're looking for flexibility, as they often offer the option of making extra repayments to pay off your loan quicker.
Sometimes, it can be hard to compare different interest rates, because aside from the interest rate, there might be extra fees and charges involved in your home loan. This means that the lowest headline interest rate is 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 interest rates on Mozo, you’ll see an interest rate, plus a comparison rate for each product.
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 what interest you’ll be paying, check with your lender.
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:
With an interest only loan your monthly repayment is 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 often, they are 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.
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 toward 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.
When choosing a home loan it’s important to secure an interest rate that works for your situation. Here are some important things you should be looking at when you compare interest rate options:
The comparison rate is designed to help you get an accurate picture of what each home loan might cost you, so don’t forget to use it.
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.
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.
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 extras 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 aren’t 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.
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.