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Are low rate home loans really the best?

Are low rate home loans really the best?

You won’t have any trouble locating a low interest rate home loan today. The Australian financial market is very competitive and it’s never been easier to compare home loans online. But is lowest the best? You need to learn to make the most of low interest rates.

The introductory rate

Most financial institutions will offer a reduced introductory, or ‘honeymoon’ period on a loan as a way to entice new customers. But what many borrowers may not realise is that these types of loans with some of the lowest interest rates initially can be some of the most expensive options on the market.

When you consider signing a home loan with an introductory rate, it’s important to know all the facts, such as the rate following the introductory period, and what exceptions (such as missing a repayment), might bump you up to the revert rate before the honeymoon period is over. It’s worth doing the sums before you sign up because it could save you thousands of dollars in the long run.

The “lowest interest rate” guarantee

From time to time, you might see promotional deals from banks, which guarantee that their home loans have the lowest rate compared to major competitors. This usually allows you to secure a home loan a few basis points below those offered by the major banks.

While a pretty attractive offer, if the major banks have rates above the market average, chances are that the deal you’ll be getting will be far from the lowest interest rate.

Fixed or variable?

When it comes to home loan hunting there’s also the question of fixed rate or variable rate, and your decision will depend on market conditions. We typically advocate that the best time to take a fixed rate is when fixed rates are within one percent above variable mortgages. But of course, there are a number of variables that will impact your decision.

To compare some of Australia’s lowest home loan rates use the RateCity home loan comparison tool and repayment calculator.

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Learn more about home loans

Does the Home Loan Rate Promise apply to discounted interest rate offers, such as honeymoon rates?

No. Temporary discounts to home loan interest rates will expire after a limited time, so they aren’t valid for comparing home loans as part of the Home Loan Rate Promise.

However, if your home loan has been discounted from the lender’s standard rate on a permanent basis, you can check if we can find an even lower rate that could apply to you.

What are the different types of home loan interest rates?

A home loan interest rate is used to calculate how much you’ll pay the lender, usually annually, above the amount you borrow. It’s what the lenders charge you for them lending you money and will impact the total amount you’ll pay over the life of your home loan. 

Having understood what are home loan rates in general, here are the two types you usually have with a home loan:

Fixed rates

These interest rates remain constant for a specific period and are a good option if you’re a first-time buyer or if you’re looking for a fixed monthly repayment. One possible downside of a fixed rate is that it may be higher than a variable rate. Also, you don’t benefit from any lowering of interest rates in the market. On the flip side, if rates go up, your rate won’t change, possibly saving you money.

Variable rates

With variable interest rates, the lender can change them at any time. This change can be based on economic conditions or other reasons. Changes in interest rates could be beneficial if your monthly repayment decreases but can be a problem if it increases. Variable interest rates offer several other benefits often not available with fixed rate home loans like redraw and offset facilities and free extra repayments. 

What happens to my home loan when interest rates rise?

If you are on a variable rate home loan, every so often your rate will be subject to increases and decreases. Rate changes are determined by your lender, not the Reserve Bank of Australia, however often when the RBA changes the cash rate, a number of banks will follow suit, at least to some extent. You can use RateCity cash rate to check how the latest interest rate change affected your mortgage interest rate.

When your rate rises, you will be required to pay your bank more each month in mortgage repayments. Similarly, if your interest rate is cut, then your monthly repayments will decrease. Your lender will notify you of what your new repayments will be, although you can do the calculations yourself, and compare other home loan rates using our mortgage calculator.

There is no way of conclusively predicting when interest rates will go up or down on home loans so if you prefer a more stable approach consider opting for a fixed rate loan.

What is the difference between fixed, variable and split rates?

Fixed rate

A fixed rate home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your repayments will be for the duration of the fixed term. There are some disadvantages to fixing that you need to be aware of. Some products won’t let you make extra repayments, or offer tools such as an offset account to help you reduce your interest, while others will charge a significant break fee if you decide to terminate the loan before the fixed period finishes.

Variable rate

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

Split rates home loans

A split loan lets you fix a portion of your loan, and leave the remainder on a variable rate so you get a bet each way on fixed and variable rates. A split loan is a good option for someone who wants the peace of mind that regular repayments can provide but still wants to retain some of the additional features variable loans typically provide such as an offset account. Of course, with most things in life, split loans are still a trade-off. If the variable rate goes down, for example, the lower interest rates will only apply to the section that you didn’t fix.