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What's new in home loans in December 2021?

It’s becoming increasingly clear that the era of low fixed interest rates is passing, with major lenders hiking rates multiple times – roughly every fortnight in the case of the Commonwealth Bank, and three times in one month for Westpac. At the time of writing, NAB is the only bank out of the big four that still offers a fixed rate starting with a 1.

But variable rates aren’t immune either, with Westpac discontinuing its 1.99% introductory variable rate, leaving it with no rates under 2 per cent. These rising rates could be one factor contributing to the growing popularity of non-major banks, according to brokers.

It’s still possible to find interest rates under 2 per cent at the time of writing, though it’s worth keeping in mind that pressure on the RBA could see the cash rate rise sooner than expected, which CBA is forecasting could contribute to a slowdown in house price growth.

Some of the lowest home loan interest rates on RateCity at the time of writing include: 

Updated by Mark Bristow on 1 December 2021

What is a home loan?

A home loan is a large amount of money that you borrow from a bank or other lender to buy a house or apartment.

As the borrower, you pledge your home as "security" or "collateral" for the loan, giving the lender the right to repossess the property if you fail to repay the loan. In legal terms, this is known as "mortgaging" your home, which is why a home loan is sometimes called a mortgage.

When you borrow money to buy a home or investment property, you'll need to pay this money back in instalments over time, plus an extra charge from the lender called "interest".

The interest you're charged on each mortgage repayment is based on your remaining loan amount, also known as your loan principal. The rate at which interest is charged on your home loan principal is expressed as a percentage. Your home loan’s interest rate is effectively the cost of “buying” the money you use to purchase property.

Because home loans are secured by the value of the property, most lenders consider them less risky than most personal loans or business loans, so their interest rates are usually lower.

What are the benefits of a home loan?

Having a home loan can deliver financial benefits. Whether you’re living in your property as an owner occupier or renting it out as an investor, your property’s value may increase over time. Your equity (the current value of your property minus your outstanding mortgage) can be used to secure other forms of credit, which can offer more financial flexibility.

  • Access to money to purchase property, which can grow in value and/or earn you income
  • Interest rates are usually lower than other loan types
  • May be able to package with other financial products

How do home loans affect your finances?

The pros of getting a home loan can often outweigh the cons. Home ownership is not a short process, and typically loans of any kind incur several years of payments, often through lengthy applications. However the end result is a home that is entirely yours, which can provide additional value and other benefits over time.

A home loan is likely one of the biggest financial commitments you’ll make in your lifetime. When you consider the high house prices in many Australian capital cities, any Australian wanting to buy their first home or invest in property will more than likely need to borrow a large sum of money to get started.

Home loan repayments can eat up a significant percentage of your household budget, much like the cost of rent. Additionally, having a large debt to your name can make it harder to apply for other forms of credit, such as car loans or credit cards, as a bank may be wary of lending you more money than you can comfortably afford to repay.

Keep in mind that as time passes, your personal and financial goals may change. If your mortgage no longer suits your financial situation, it is possible to switch to a new home loan, or even another lender. This is called refinancing your home loan, and it can help you benefit from a lower interest rate, more useful features and benefits, or access to the equity in your property, such as through a line of credit. You could even use the equity in your existing home loan in place of a deposit when applying for a mortgage on your next home or an investment property. 

  • Long loan term means you may be in debt for a long time
  • Interest costs and fees can build over time
  • Application process can be complex

Where do home loan interest rates come from?

Banks and mortgage lenders set their home loan interest rates based on a range of factors, including the national cash rate, which helps determine the ‘wholesale’ cost of funding for lenders to provide home loans and other financial services.

The cash rate is set by the Reserve Bank of Australia (RBA) which meets almost every month to decide whether to increase the cash rate, decrease it, or keep it on hold. Mortgage lenders often pass changes in the cash rate on to their customers, with home loan interest rates rising or falling when the RBA raises or lower the cash rate.

However, not every lender will automatically pass cash rate changes on to their customers. Some may choose to only pass on part of the change, or only change the interest rates on selected home loan products. Mortgage lenders may also choose to increase or decrease their interest rates out of cycle with the RBA, based on other factors affecting the Australian and international economies.

How much do you need for a home loan?

Buying a property often means paying for more than just the house itself. While your deposit plus your loan amount should cover the property’s purchase price, you’ll also need to have enough money saved to cover other upfront costs, such as:

  • establishment fees
  • lender’s mortgage insurance (LMI)
  • stamp duty
  • conveyancing or valuation fees

These costs can vary, and you can use online calculators to estimate how much extra you may need to budget for.

How much money can I borrow?

A responsible mortgage lender will only approve a loan amount that they’re confident you can comfortably afford to repay, given your household income and expenses. You can use a home loan calculator to work out the potential cost of your repayments.

While the exact amount you can be pre-approved for will depend on your financial situation and the lender’s policies, a borrowing power calculator can provide an estimated loan amount that you may be approved for.

Is it better to borrow less?

Most lenders prefer that a borrower pays an upfront deposit on a property of at least 20 per cent of the purchase price, with the mortgage covering the rest. That said, it may be possible to get a home loan with a deposit as small as 5 per cent.

A bigger upfront deposit and smaller loan amount may help to make your mortgage repayments more affordable, so you can pay off the property faster and pay less interest in total. But a bigger loan with a smaller deposit means you can spend less time saving and join the property market sooner.

Also, if you get a bigger loan with a smaller deposit, you’re more likely to need to pay for Lender’s Mortgage Insurance (LMI), which could potentially add tens of thousands of dollars to your upfront costs. You can also use an online LMI calculator to estimate how much you may need to pay.

How much will a home loan cost you?

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Home loans features & fees

A home loan is more than just a large amount of money loaned to you by a bank or lender to buy your property. While it could be used for a first home, a new home, refinancing, or investment properties, there are features and fees to be on the look out for beyond that large sum of money you're being loaned. 

Loan purpose – owner occupier or investor

If you’re buying a property to live in, you’re an owner occupier. If you’re buying a property to rent out and earn income, you’re an investor. Different home loans are available for owner occupiers and investors.

Owner occupied home loans often have lower interest rates than investment loans, as lenders consider owner occupiers less likely to default on their repayments (and lose the roof over their head!). However, investor loans may have more flexible features and benefits that could help property investors better manage their property and their repayments.

Home loan interest rates – fixed or variable

Many home loans have a variable interest rate, where the interest you’re charged on each repayment may increase or decrease. Your variable rate home loan may be influenced by the national cash rate set by the Reserve Bank of Australia (RBA), availability of your lender’s overseas funding, and other changes to the economy.

You may be able to lock in your interest rate for up to five years with a fixed rate home loan. A fixed interest rate can help protect you from interest rate rises for a limited time, though you also won’t benefit from savings if rates fall during the fixed rate period. Plus, you may not be able to benefit from as many flexible features and benefits, and you may have to pay expensive break fees if you choose to refinance during the fixed term. And once the fixed rate term expires, your loan will revert to the lender’s standard variable rate, which could lead to bill shock if interest rates have risen.

Comparison rate

Many lenders don’t just charge interest on their home loan products, but upfront and ongoing fees as well. This can sometimes mean a mortgage with a low interest rate and high fees could actually cost you more than a higher-rate home loan with low or no fees.

With this in mind, mortgage lenders in Australia are required to show a comparison rate alongside their advertised interest rates. The comparison rate combines the cost of a loan’s interest rate with its standard fees and charges, to give you a better idea of which home loans may cost you more in total at a glance. 

Not every extra fee will be included in the comparison rate, such as fees for accessing optional home loan features, so it’s still important to carefully compare home loans before making a choice. Also, keep in mind that to ensure consistency across the market, all comparison rates are calculated based on a $150,000 principal and interest home loan with a 25 year term, which may not closely reflect the mortgage you’re looking for.

Repayment type – principal & interest or interest only

Most home loans have principal and interest repayments, where each month (or fortnight, or week), you’re required to pay the lender back a portion of the money you owe (the loan principal) plus an interest charge. This slowly but surely pays off your loan, building your  equity until you own your property outright.

You may be offered the option to switch to interest-only repayments for a limited time. Because you’ll only be covering the cost of the interest charged on your mortgage principal, this can reduce the cost of your mortgage repayments, leaving some extra breathing room in your household budget for the short term. However, because these repayments don’t reduce your loan principal, it will take longer to pay off your property, costing you more in total interest over the long term.

Deposits, LVR and LMI

To apply for a home loan, you’ll first need to save up a deposit on the property you’re buying. Most mortgage lenders prefer that you pay an upfront deposit of 20 per cent of the property value, as this demonstrates your financial responsibility and helps reduce the risk of lending to you.

The deposit required on a home loan is sometimes expressed as the Loan to Value Ratio (LVR). For example, if a lender requires a 20 per cent deposit, their loan may be advertised as having an 80 per cent LVR as part of the lending criteria. If you already own a property (such as if you’re refinancing), the equity in your property may be used in place of a deposit.

It’s possible to get a home loan with a smaller deposit of 10 or even 5 per cent (LVR 90 or 95 per cent respectively). However, if your LVR is higher than 80 per cent, the lender will likely take out a Lender’s Mortgage Insurance (LMI) policy to cover them against the higher risk of you defaulting on your mortgage repayments. LMI protects the lender, not the borrower, and most lenders pass the cost of LMI on to the borrower – the higher your LVR, the more the LMI may cost, up to tens of thousands of dollars.

You may be able to get a home loan with a low deposit, or even no deposit at all, with the help of a guarantor. By having a close family member such as a parent guarantee your mortgage with the equity in their own property, you may get a home loan sooner, without having to save as much money for a deposit and LMI charges, though going guarantor comes with its own share of risks.

There are also a range of grants and incentives available from the state and federal governments that could help you with your deposit, especially if you’re a first home buyer. These include the First Home Owner Grants (FHOGs), the First Home Loan Deposit Scheme (FHLDS) and the First Home Super Saver (FHSS) scheme.

Extra repayments, redraw facility and offset account

A popular feature found with many (though not all) home loans is the ability to make extra repayments. This could include paying a lump sum onto your mortgage principal (such as when you get a tax refund), or making regular principal and interest repayments that are a bit higher than the required minimum amount. Additional repayments can help to lower your outstanding mortgage principal, potentially lowering your interest charges and helping you pay off your property sooner.

But what if you’ve put all of your spare savings onto your home loan and an emergency comes up, like having to pay for car repairs or an unexpected bill? In cases like this, it can be handy to have a home loan that features a redraw facility, which will let you take any extra repayments you’ve previously made onto your home loan back out again, putting the cash back in your bank account when you need it.

Another popular home loan feature is an offset account – a savings or transaction account that’s linked to your mortgage. Money deposited in your offset account is included when calculating your home loan’s interest charges, which can help you pay less interest. For example, if you have a $300,000 home loan, and $50,000 saved in your offset account, you’ll be charged interest as if you only owed $250,000 on your mortgage.

All of these extra features and benefits can give your home loan additional value. But keep in mind that the more “bells and whistles” a home loan has, the more likely you’ll pay higher fees or a higher interest rate. Sometimes a “no frills” home loan with a low rate and no fees can be a more affordable alternative that better suits your needs.

Potential home loan fees

Generally, the more features and benefits a home loan offers, the higher its fees may be.

Some of the home loan fees you may expect to see include:

  • Upfront fees: Paid at the start of your home loan term to help cover the admin cost of processing your application
  • Ongoing fees: Annual or monthly fees that help cover the lender’s ongoing admin costs
  • Break fees: Charged when you exit a loan during the fixed-rate period, such as when you refinance to another lender
  • Exit and discharge fees: The Federal Government banned exit fees in 2011, though discharge fees may be charged when you reach the end of your home loan’s term
  • Redraw fees: If your mortgage has a redraw facility, you may be charged a fee when you use this feature to access the extra repayments you’d previously paid onto the loan.

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How long does a home loan last?

Most mortgages have loan terms measured in decades, with 20 to 30 years being common. The longer your home loan term, the lower your monthly (or fortnightly, or weekly) repayments may be, but the more interest you’ll likely end up paying on your property in total. The shorter your home loan term, the more your monthly repayments will cost, but you’ll likely pay less total interest on your property.

During times of financial stress, you may choose to temporarily switch your home loan over to interest-only repayments, or to ask your lender for a mortgage freeze (sometimes called a mortgage holiday) for a limited time. Switching to interest-only can greatly reduce your mortgage repayments, while freezing your mortgage means temporarily making no repayments at all. This can provide some much-needed relief in the short term while you get your finances in order.

However, taking a mortgage holiday or temporarily switching to interest-only repayments could cost you more in the long run. During an interest-only period, you won’t be reducing your mortgage principal, so your home loan may take longer to pay off. Similarly, during a mortgage freeze your lender will typically capitalise your interest into your mortgage principal, so you’ll likely have a bigger loan to pay off at the end of the mortgage holiday. Either way, the longer it takes to pay off your property, the more interest you’ll likely end up paying on your home loan.

Does the government help home buyers?

Both the state and federal governments offer a variety of grants and incentives to help home buyers, especially first home buyers.

Most state and territory governments offer a First Home Owner’s Grant (FHOG) or similar incentives (such as discounted or waived stamp duty) to assist borrowers buying their first property.

The federal government’s First Home Loan Deposit Scheme (FHLDS) is a program that allows borrowers to apply for a mortgage with a deposit of just 5 per cent and pay no LMI, as the government will step in to guarantee the remainder of the deposit. Keep in mind that there are a limited number of places available in this program each financial year, and only a limited number of lenders are participating in the program. Also, both the borrower(s) and the property bring bought will need to satisfy a number of terms and conditions to be eligible.

Another government program that may be useful to home buyers is the First Home Super Saver (FHSS) scheme. This allows borrowers to make extra contributions into their superannuation fund, where you can’t easily access your cash for everyday spending. These contributions can later be withdrawn from your super fund to help cover the cost of your deposit – up to $15,000 of voluntary contributions per financial year, up to a total of $30,0000 in contributions across all years.

How to find and compare home loans

  1. Calculate your budget: Consider using a mortgage calculator to work out how much you can borrow, what your repayments could be, and how much you can pay as a deposit (including grants and incentives).
  2. Compare advertised rates and comparison rates: The home loans with the lowest rates may not be the best home loans for you, or even the cheapest. The comparison rate combines the costs of interest, fees and charges into a single percentage, so you can quickly get a better idea of how much a home loan may cost you overall.
  3. Check the fees, features and other benefits: Not all of a home loan’s fees and charges are included in its comparison rate. Consider checking for any extra costs that you may need to pay, to avoid nasty surprises. Also, some mortgage lenders have special offers for new customers, such as interest rate discounts or even cashback. Consider the value of these deals before you apply, and don’t forget to check the eligibility criteria and the terms and conditions.
  4. Check Real Time Ratings™: A quick way to estimate the cost and flexibility of a home loan before you enquire is to look at its Real Time Rating™ which is updated daily to more closely indicate a home loan’s overall value. You can also compare some of the top-rated home loans on the RateCity Leaderboards, or look for which mortgage have won a RateCity Gold Award.
  5. Consider help from a mortgage broker: These home loan experts can look at your finances and recommend mortgage deals that may suit your personal goals and financial needs. Brokers can also negotiate on your behalf to help you get a better deal, provide access to exclusive home loan offers, and manage your mortgage application on your behalf, to help save you time and hassle.

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How to apply for a home loan

  1. Check your finances: Compare your income and expenses to the cost of home loan repayments, as well as the deposit, stamp duty, and any other fees and charges that may apply, such as an annual package fee for a bundled home loan deal.
  2. Collect financial documents: Payslips, bank statements, bills etc. can be used to confirm your income and expenses.
  3. Fill out a lender’s home loan application form: This could be a paper form or online.
  4. Get pre-approval: This is where a lender agrees in principle to provide a loan, but you or the lender can still walk away.
  5. Make an offer on a property: Whether you’re buying at auction or by private treaty, make sure the price is within your budget.
  6. Credit check and valuation: The lender will check your credit score (based on your history of managing money) and calculate the value of the property to make sure you haven’t over-borrowed.
  7. Application approval: Assuming you’re successful, sign the formal home loan offer and contract.
  8. Prepare for settlement: This is the legal transfer of the property from one owner to another. A solicitor or conveyancer can help confirm that everything is done correctly.
  9. That’s it! Time to move in or start looking for tenants.

Do you compare mortgages using the comparison or advertised rate?

A lot of Australians compare home loans using the advertised interest rate, which indicates how much interest you’ll be charged on your mortgage repayments. The lower your rate, the cheaper your home loan should be.

However, interest charges aren’t the only cost associated with home loans. Most mortgage lenders also charge fees on their home loans. A mortgage with a low interest rate and high fees can sometimes cost more than a mortgage with a high interest rate and low fees.

A home loan’s comparison rate combines the cost of interest with the cost of standard fees and charges into a single percentage rate. Mortgage lenders are required to display a comparison rate alongside their advertised rate to better indicate the home loan’s overall cost.

Keep in mind that to ensure consistency, all comparison rates are calculated assuming a $150,000 principal and interest mortgage with a 25 year term. As your home loan may be different, the comparison rate may not accurately reflect exactly how much your home loan may cost. Also, the comparison rate doesn’t include every home loan fee and charge, so it’s still important to compare home loans and read the fine print before you apply.

What is a mortgage rate?

The interest rate on a home loan is sometimes called the mortgage rate. This percentage indicates how much interest the lender will charge you with each home loan repayment. Your interest rate is effectively the “cost” of “buying” the money you’re using to buy a property – the higher your mortgage rate, the more your home loan repayments may cost.

Using a home loan calculator, you can estimate how much your home loan repayments may cost, based on your mortgage rate, loan term, and loan amount. This may also be affected by whether you’re making principal and interest repayments or interest-only repayments, if you have a fixed rate or variable rate mortgage, and any fees and other charges that may apply.

What is a home loan?

A home loan is a finance product that allows a home buyer to borrow a large sum of money from a lender for the purchase of a residential property. The home is then put up as "security" or "collateral" on the loan, giving the lender the right to repossess the property in the case that the borrower fails to repay their loan.

Once you take out a home loan, you'll need to repay the amount borrowed, plus interest, in regular instalments over a predetermined period of time.

The interest you're charged on each mortgage repayment is based on your remaining loan amount, also known as your loan principal. The rate at which interest is charged on your home loan principal is expressed as a percentage.

Different home loan products charge different interest rates and fees, and offer a range of different features to suit a variety of buyers’ needs.

Is the lowest home loan rate always the cheapest?

The home loan with the lowest interest rate may not always be the cheapest mortgage option for you. Sometimes a home loan with a low interest rate may charge high fees, which may cost more in total than a mortgage with a higher interest rate and no fees.

Consider checking the comparison rate, which combines interest and standard fees, to get a better idea of the overall cost of different home loan options.

How do I apply for a home improvement loan?

When you want to renovate your home, you may need to take out a loan to cover the costs. You could apply for a home improvement loan, which is a personal loan that you use to cover the costs of your home renovations. There is no difference between applying for this type of home improvement loan and applying for a standard personal loan. It would be best to check and compare the features, fees and details of the loan before applying. 

Besides taking out a home improvement loan, you could also:

  1. Use the equity in your house: Equity is the difference between your property’s value and the amount you still owe on your home loan. You may be able to access this equity by refinancing your home loan and then using it to finance your home improvement.  Speak with your lender or a mortgage broker about accessing your equity.
  2. Utilise the redraw facility of your home loan: Check whether the existing home loan has a redraw facility. A redraw facility allows you to access additional funds you’ve repaid into your home loan. Some lenders offer this on variable rate home loans but not on fixed. If this option is available to you, contact your lender to discuss how to access it.
  3. Apply for a construction loan: A construction loan is typically used when constructing a new property but can also be used as a home renovation loan. You may find that a construction loan is a suitable option as it enables you to draw funds as your renovation project progresses. You can compare construction home loans online or speak to a mortgage broker about taking out such a loan.
  4. Look into government grants: Check whether there are any government grants offered when you need the funds and whether you qualify. Initiatives like the HomeBuilder Grant were offered by the Federal Government for a limited period until April 2021. They could help fund your renovations either in full or just partially.  

Fact Check Verification

The information on this page was fact checked by Matthew Tinson, a broker in Queensland specialising in home loans, car financing, personal loans, debt consolidation, and asset financing. For more information on how brokers like this can assist you, look for a broker near you