Why is it important to compare home loans?
- Do you have the best home loan interest rate on the market?
- Are your mortgage repayments higher than the Australian average?
- Are you missing out on home loan features or discounts because you haven't switched lenders in years?
All of these questions are reasons to compare home loans with a financial comparison website like RateCity.
With thousands of home loans on the Australian market, it can be difficult to decide which one will be best for you. If you make a home loan comparison, you can look at the interest rates, features and benefits of several different home loans side by side.
How to compare home loans
Start your home loan comparison by asking yourself the following questions:
- How much do you want to borrow? - The more you choose to borrow, the higher the repayments you’ll likely need to budget for.
- How much deposit can you afford? - Lenders generally offer borrowers with higher security deposits lower home loan interest rates. If your deposit is less than 20% of the property value, you may be required to pay Lender’s Mortgage Insurance (LMI).
- How long a loan term do you want? – Many home loans have 30-year terms, though some can last for 25 years or less, or run as long as 45 years. Generally, the longer your loan term, the less interest you’ll pay each month, but the more interest you’ll be charged in total.
- Are you buying as an owner-occupier or investor? - Investors are often charged higher home loan interest rates than owner-occupiers.
- What do you want in a mortgage? Are you looking for low interest rates for more affordable repayments? Or do you need a range of flexible home loan features e.g. offset account, extra repayments, redraw facility?
Once you've worked out your preferences, you can start to narrow down your list of potential home loan options when making your mortgage comparison.
Example: Finding a low rate investment loan
Roy is a first-time investor who wants the lowest current home loan interest rate on the market. He has a deposit of $100,000 and wants a loan of $500,000. By selecting a loan term of 30 years using RateCity’s compare home loans function, he discovers there are more than 1000 potential loans available to him.
Roy previously asked his bank, one of the big four banks, about the cost of a home loan. During his home loan comparison, Roy discovers there are at least five lenders on RateCity that can shave up to $80 a month off what his bank offered, with interest rates below 4.2%. Over 30 years, that adds up to a significant saving of over $28,000.
Roy wants to know more about one of the loans on offer, due to its low rate and low fees. He simply clicks the ‘View Now’ button to be directed to the lender’s website.
How to find the lowest rates on RateCity
To see what current home loan interest rates are available in Australia today, and to find the lowest interest rates you're likely to be eligible for, start by following these steps:
- Enter some basic home loan search details at RateCity e.g. whether you’re an owner occupier or investor; how much you plan to borrow versus the property value; your preference for fixed or variable interest rates.
- Add more filters to further narrow down your home loan search. The more details you can provide, the more precise your mortgage search results can be.
- Sort RateCity’s comparison table either by Advertised Rate (for interest rate only) or Comparison Rate (for the approximate cost of interest plus fees) to find the lowest available results for your search.
What is considered a good interest rate on a home loan?
While different home loan features and benefits may more closely fit the needs of different borrowers, an interest rate of 4% or lower is generally considered to be a good interest rate for a home loan when making a mortgage comparison.
It’s important to remember that some low-interest home loans are relatively basic, offering fewer additional features and benefits. The lowest interest rates in Australia may not be available to every borrower, due to the specific financial requirements of different loans.
Australia's average home loan interest rate changes regularly, as mortgage offers enter or exit the market. Because every mortgage is different, you’ll need to decide what is the best home loan for your needs.
Seeing how much extra interest you may need to pay for home loans with additional features can help you get a better idea of the value they can offer your household finances.
How to customise your home loan comparison results
When you compare home loans, you have the option to enter your preferred features to help you find an option that better suits your needs.
The first option to consider is whether you want a variable rate loan or a fixed rate loan:
- Variable rate home loans – Variable interest rates may change during your mortgage term, often in line with changes to the RBA’s official cash rate, but sometimes independently, depending on your lender. If your lender passes on a rate cut, you could save money on your mortgage repayments, but if rates rise, you could find yourself paying more.
- Fixed rate home loans – Home loan interest rates can sometimes be fixed for a limited time, often from one to five years. During this time, there will be no changes to your mortgage repayments, for simple and consistent budgeting. This can protect you from increasing repayments if interest rates rise, but you could also miss out on savings if interest rates fall.
- Split rate home loans - Some borrowers also choose to split their home loan interest rates between fixed and variable to lock in a bit of certainty, while also making the most of low rates.
You can also choose between making principal and interest repayments or interest-only repayments:
- Principal and interest (P&I) repayments – These loan payments let you gradually pay off the amount you’ve borrowed at the same time as the interest charges. While P&I repayments tend to be more expensive from month to month, they let you make steady progress towards clearing your debt and minimising the total interest you’re charged.
- Interest-only (IO) repayments - Some lenders allow you to delay paying the debt you owe and simply pay the interest charges for a limited time (generally between one and five years). This can help make your repayments more affordable in the short term, though you may end up paying more total interest over the loan’s full term as you won’t be reducing the principal owing.
Select your home loan features
After you’ve chosen your preferred type of home loan, interest rate and repayments, you can compare mortgages with some popular home loan features, such as an offset account, a redraw facility, or extra repayments.
- Offset account - Allows you to reduce the interest you pay by offsetting what you owe using money in a separate, but linked account. For example, if you owe $300,000 but have $50,000 in an offset account, you’ll be charged interest as if you only owed $250,000, shrinking your interest costs.
- Extra repayments - Some lenders allow you to make extra mortgage repayments if you have a good month or receive a one-off windfall. This can help you pay off your loan more quickly, and reduce the interest you’re charged.
- Redraw facility - A redraw facility lets you withdraw any extra home loan repayments you’ve made if you need that money back in your pocket, which can be useful for covering unexpected expenses without having to borrow more money with a credit card or personal loan.
Choose your fees
One of the benefits when you compare home loans with a financial comparison website like RateCity is that as well as looking at home loan interest rates, you can also compare fees. High fees on a home loan can negate the impact of a low interest rate, so they’re important to consider.
Some of the fees you’re likely to encounter during your mortgage comparison include:
- Upfront fees – These are the fees the lender will charge when you start your loan. They sometimes include establishment fees, conveyancing fees, stamp dutyand Lender’s Mortgage Insurance (LMI). Upfront fees vary significantly between lenders.
- Ongoing fees – These are the fees your lender charges either monthly or yearly for the upkeep of your loan.
- Redraw fees – If you choose a loan with a redraw facility, sometimes making redraws comes with a fee.
- Discharge fees– At the conclusion of your loan, your lender may charge a termination fee to cover the administration costs.
Example: Flexibility seals the deal
Louise already has a home loan, but it doesn’t offer many benefits. She instead wants to refinance onto a loan where she can offset interest and make extra repayments once a year when she gets her tax refund. However, she doesn’t want to pay a high interest rate or high fees for those benefits.
To compare home loans, Louise enters her preferences at RateCity and finds there are a dozen loans with no ongoing fees, but many features. Even better, many of those home loans have interest rates lower than 4%, when at the moment she has a 4.5% interest rate. By switching, she stands to save more than $1600 a year.
|Current home loan||New home loan|
|Loan amount owing||$500,000||$500,000|
|Remaining loan term||25 years||25 years|
|Total interest paid||$333,749||$297,755|
|Total loan cost||$833,749||$791,755|
Above examples are hypothetical and for illustrative purposes only. Calculation source: MoneySmart
Other types of loans to compare
RateCity also allows you to compare less common types of home loans, such as low doc loans.
A low documentation loan is for borrowers who do not have the documents that are typically required to apply for a mortgage, such as:
- Regular payslips
- Steady employment history
- Clean credit history
As a result, lenders often treat these customers as higher default risks, and decline their applications for standard home loans.
If you are in this position, it may be helpful to compare the low doc options on the market, as the current home loan interest rates on offer can vary significantly.