Factors affecting your mortgage rate

Factors affecting your mortgage rate

You may have seen mortgage interest rates advertised on lenders websites or sites like RateCity and wondered how they are set and how you can get a better deal. 

Usually lenders will set a benchmark rate, which is called the standard variable rate. As the name suggests, it’s the general rate on offer to mortgage customers. However, lenders often offer various discounts on the standard variable rate depending upon the borrower’s characteristics. Being aware of the factors affecting your mortgage rate may help to position yourself as an ideal borrower in the eyes of the lender and to score a rate reduction. 

What determines your mortgage interest rate?

Suppose you applied for a mortgage with a lender that follows risk-based pricing. In that case, it’s natural that a borrower with a low risk profile will be considered to receive a larger discount. In other words, all else being equal, someone with a high credit score is likely to secure a lower mortgage interest rate than someone who has an average credit score. But there are other indicators of how much of a risk you may pose to lenders that tend to affect your mortgage rate, including your loan-to-value ratio (LVR), your property’s location, your other assets and the type of income you earn.

By understanding the factors that determine your mortgage rate, you can time your application to when you meet lenders’ discount criteria, shop around for a mortgage more confidently and make an informed choice. You may also decide to make some changes in your personal and financial life, like developing a regular saving habit or working towards a better credit score, to increase your chances of negotiating a better discount on your home loan interest rate.

Factors affecting mortgage rates for home buyers generally

One common factor that tends to affect the mortgage rate is the official cash rate set by the Reserve Bank of Australia (RBA). The official cash rate is the market rate on overnight loans between financial intuitions. To manage the economy, especially inflation, the RBA may raise or cut the official cash rate by a measure of basis points. 

Lenders tend to move in the direction of the changes in the rate cut. This means that mortgage interest rates tend to increase and drop each time there’s a rise or cut in the official cash rate, respectively. 

However, lenders don’t necessarily have to follow the cash rate when setting their interest rates. Having said that, a bank that fails to pass on the cash rate cut to its customers might earn a bad reputation and risk losing customers. As a result, there is pressure on lenders to follow the official cash rate when determining their standard variable rates.

Factors affecting individual mortgage rates

In addition to the RBA’s cash rate, there are a few factors that may influence the interest rate offered to individual borrowers.

1. Loan-to-value ratio

The loan-to-value ratio refers to the percentage of a property’s value that a financial institution will let you borrow for a home loan. For example, if a lender requires a loan-to-value ratio of 80 per cent, it means that you’ll have to come up with 20 per cent of the total value of the property to be approved for this home loan. Generally, an LVR of 80 per cent or less is considered lower risk by lenders for most standard types of home loans. 

If your LVR is over 80 per cent, you’d be typically required to pay lenders’ mortgage insurance (LMI) to reduce the risk to the lender. An LMI premium can potentially add thousands of dollars to your home loan amount. Even with LMI, high LVR loans are considered riskier and you might end up paying a slightly higher interest rate when you apply for a home loan with less than 20 per cent deposit. 

Even if you find that you are being offered a comparable rate with a lower deposit, bear in mind that you’ll have to pay the LMI premium, which will increase your overall borrowing cost over the life of the loan. 

2. Your mortgage size

According to an RBA publication, borrowers applying for larger loans have traditionally attracted sizeable discounts from lenders. According to the example quoted, a borrower with loan approval for $1,000,000 may attract a 12-basis-points larger discount than a smaller sized loan of $400,000 with comparable characteristics. 

It’s suggested that borrowers seeking larger loans likely have more bargaining power to negotiate larger discounts. Furthermore, lenders are sometimes more willing to offer greater discounts on larger borrowings, owing to the fixed costs associated with writing loans, irrespective of the size. 

3. Your credit score

Your credit score is an important factor used by lenders to predict how reliable you might be in paying down your home loan. Your credit score is calculated based on your credit report, which is a comprehensive record of your financial history. If you have been paying your bills regularly and making all your debt repayments in a timely fashion, you are likely to have a high credit score, making you a low-risk borrower in lenders’ eyes. 

On the other hand, if you’ve defaulted on your payments in the past or don’t have much of a credit history, your score may be low. Depending on the lender you apply with, a low score can potentially derail your mortgage application or you might end up paying a higher interest rate on your mortgage.

If you’re planning to apply for a home loan, it may be worthwhile to pull out your credit report online and double-check it for any errors that might be reducing your credit score and preventing you from qualifying for better interest rates. If you find any errors, dispute them immediately to have them removed from your file.

If you have made mistakes in the past but your finances are back on track and you think you can afford a mortgage, you may consider speaking with a broker to apply for a home loan with low credit. 

4. Other factors impacting your home loan

Several other variables impact your mortgage interest rate, but may have a smaller effect than those listed above. For instance, some lenders might offer slightly different interest rates depending on where your house is situated.

The type of loan also tends to make a difference. Construction loans often receive smaller discounts compared to home loans secured against existing properties. Additionally, if you are a self-employed individual without proper documentation to prove your income, you might be eligible for a low doc loan that is usually associated with a higher interest rate compared to a standard mortgage loan. 

Your mortgage interest rate also varies according to the type of property. Investment loans tend to attract higher interest rates than owner-occupied loans, as lenders typically view investors as higher risk borrowers. 

Even the term of your loan can impact its interest rate. Generally, short term loans come with lower interest rates, but the monthly repayment might be higher owing to the shorter timespan for paying back the loan. That’s because your monthly repayment amount is calculated using several factors, including your loan amount, interest rate, and term. You may use an online calculator to crunch the numbers and see how your monthly repayments change as you vary the term of your home loan.

Comparing home loan rates: What you should keep in mind

There are multiple factors affecting your mortgage rate, but all lenders have slightly different methods in place to assess your mortgage application. It is generally considered prudent to shop around and compare home loans from multiple lenders, before choosing one that is right for your needs.

Keep in mind the cheapest home loan might not always be the right home loan for your situation. Besides the home loan interest rate, it is sometimes worth considering any additional features that could help you in meeting your long term goals, even though you might end up paying slightly extra for them. 

You can also connect with a mortgage broker to navigate the mortgage market’s complexities with confidence and ease. A good mortgage broker can help you find home loans with affordable interest rates and features to meet your long term financial goals, as well as negotiate with lenders on your behalf to potentially secure you a competitive deal.  

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This article was reviewed by Kate Cowling before it was published as part of RateCity's Fact Check process.



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Learn more about home loans

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.

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. 

How long can you fix a home loan rate for?

Most lenders should let you fix your interest rate for anywhere between one and five years. While rare, a few lenders may offer fixed rate terms for as long as 10 years.

Fixing your home loan interest rate for a longer term can keep your budgeting fairly straightforward, as you shouldn't have to factor in changes to your mortgage repayments if variable rates change, such as when the Reserve Bank of Australia (RBA) changes its rates at its monthly meeting. Additionally, if variable rates rise during your fixed rate term, you can continue to pay the lower fixed rate until the fixed term ends, potentially saving you some money.

Of course, a longer fixed term also means a longer length of time where you may have less flexibility in your home loan repayments. It’s also a longer period where you won’t be able to refinance your mortgage without paying break fees. If variable rates were to fall during this period, you may also be stuck paying a higher fixed rate for a longer period.

What is a variable home loan?

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.

What is a comparison rate?

The comparison rate is a more inclusive way of comparing home loans that factors in not only on the interest rate but also the majority of upfront and ongoing charges that add to the total cost of a home loan.

The rate is calculated using an industry-wide formula based on a $150,000 loan over a 25-year period and includes things like revert rates after an introductory or fixed rate period, application fees and monthly account keeping fees.

In Australia, all lenders are required by law to publish the comparison rate alongside their advertised rate so people can compare products easily.

What is a standard variable rate (SVR)?

The standard variable rate (SVR) is the interest rate a lender applies to their standard home loan. It is a variable interest rate which is normally used as a benchmark from which they price their other variable rate home loan products.

A standard variable rate home loan typically includes most, if not all the features the lender has on offer, such as an offset account, but it often comes with a higher interest rate attached than their most ‘basic’ product on offer (usually referred to as their basic variable rate mortgage).

How do you determine which home loan rates/products I’m shown?

When you check your home loan rate, you’ll supply some basic information about your current loan, including the amount owing on your mortgage and your current interest rate.

We’ll compare this information to the home loan options in the RateCity database and show you which home loan products you may be eligible to apply for.


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.

What is the best interest rate for a mortgage?

The fastest way to find out what the lowest interest rates on the market are is to use a comparison website.

While a low interest rate is highly preferable, it is not the only factor that will determine whether a particular loan is right for you.

Loans with low interest rates can often include hidden catches, such as high fees or a period of low rates which jumps up after the introductory period has ended.

To work out the best value for money, have a look at a loan’s comparison rate and read the fine print to get across all the fees and charges that you could be theoretically charged over the life of the loan.

How do I calculate monthly mortgage repayments?

Work out your mortgage repayments using a home loan calculator that takes into account your deposit size, property value and interest rate. This is divided by the loan term you choose (for example, there are 360 months in a 30-year mortgage) to determine the monthly repayments over this time frame.

Over the course of your loan, your monthly repayment amount will be affected by changes to your interest rate, plus any circumstances where you opt to pay interest-only for a period of time, instead of principal and interest.

What is the Home Loan Rate Promise?

The Home Loan Rate Promise is RateCity putting its money where its mouth is. We believe that too many Australians are paying too much for their home loans. We’re so confident we can help Aussies save money, if we can’t beat your current rate, we’ll give you a $100 gift card.*

There are two reasons it pays to check your rate with the Home Loan Rate Promise:

  • You can find out how much you could save on your home loan by switching to a loan with a lower interest rate
  • If we can’t beat your current rate, you can claim a $100 gift card with our Home Loan Rate Promise*

How much are repayments on a $250K mortgage?

The exact repayment amount for a $250,000 mortgage will be determined by several factors including your deposit size, interest rate and the type of loan. It is best to use a mortgage calculator to determine your actual repayment size.

For example, the monthly repayments on a $250,000 loan with a 5 per cent interest rate over 30 years will be $1342. For a loan of $300,000 on the same rate and loan term, the monthly repayments will be $1610 and for a $500,000 loan, the monthly repayments will be $2684.

What are the responsibilities of a mortgage broker?

Mortgage brokers act as the go-between for borrowers looking for a home loan and the lenders offering the loan. They offer personalised advice to help borrowers choose the right home loan for their needs.

In Australia, mortgage brokers are required by law to carry an Australian Credit License (ACL) if they offer credit assistance services. Which is the legal term for guidance regarding the different kinds of credit offered by lenders, including home loan mortgages. They may not need this license if they are working for an aggregator, for instance, as a franchisee. In both these situations, they need to comply with the regulations laid down by the Australian Securities and Investments Commission (ASIC).

These regulations, which are stipulated by Australian legislation, require mortgage brokers to comply with what are called “responsible lending” and “best interest” obligations. Responsible lending obligations mean brokers have to suggest “suitable” home loans. This means loans that you can easily qualify for,  actually meet your needs, and don’t prove unnecessarily challenging for you.

Starting 1 January 2021, mortgage brokers must comply with best interest obligations in addition to responsible lending obligations. These require mortgage brokers to act in the best interest of their customers and also requires them to prioritise their customers’ interests over their own. For instance, a mortgage broker may not recommend a lender who gives them a commission if that lender’s home loan offer does not benefit that particular customer.