One of the most important parts of applying for a home loan in Australia is finding a loan that best suits your budget and financial needs. 

Whether you're a first home buyer, investment property mogul, or considering refinancing your existing mortgage, finding a cheap and affordable home loan is at the top of everyone's 'must have' list. Here is how you can find the cheapest home loan for your financial situation.

Find and compare cheap home loans

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2.19%

Fixed - 3 years

2.45%

Macquarie Bank

$1.3k

Redraw facility
Offset Account
Borrow up to 70%
Extra Repayments
Interest Only
Owner Occupied

3.57

/ 5
More details

2.74%

Fixed - 5 years

2.62%

Macquarie Bank

$1.4k

Redraw facility
Offset Account
Borrow up to 70%
Extra Repayments
Interest Only
Owner Occupied

2.63

/ 5
More details

2.59%

Variable

2.64%

Reduce Home Loans

$1.4k

Redraw facility
Offset Account
Borrow up to 80%
Extra Repayments
Interest Only
Owner Occupied

4.45

/ 5
More details

2.79%

Variable

2.86%

Reduce Home Loans

$1.4k

Redraw facility
Offset Account
Borrow up to 80%
Extra Repayments
Interest Only
Owner Occupied

2.63

/ 5
More details

2.89%

Variable

2.92%

Reduce Home Loans

$1.4k

Redraw facility
Offset Account
Borrow up to 80%
Extra Repayments
Interest Only
Owner Occupied

2.58

/ 5
More details

1.98%

Fixed - 1 year

2.38%

Homestar Finance

$1.3k

Redraw facility
Offset Account
Borrow up to 80%
Extra Repayments
Interest Only
Owner Occupied

3.46

/ 5
More details

Learn more about home loans

What makes up a cheap home loan?

If you're looking for the most affordable home loan for your budget, there's a few loan features you'll want to keep in mind before you make your loan application:

  • Interest rate - One of the biggest factors of a home loan's affordability. The higher the interest rate, the more expensive your loan repayments will be. Keep in mind that the lowest interest rates in the market are typically reserved for customers who meet specific criteria, as outlined below.
  • Fees - There are a range of potential home loan fees you may be charged that contribute to the overall cost of the mortgage. This includes, ongoing fees, application fees, upfront fees, late payment fees and more.
  • Features - If you opt for a home loan with all the bells and whistles, you'll typically find the mortgage is more expensive through fees and interest. Features could include the ability to make additional repayments, a redraw facility or an offset account. It may also mean choosing a home loan package with bundled credit cards, transaction accounts and a line of credit.Keep in mind that features such as the ability to make extra repayments, or hold an offset account, might mean higher ongoing fees, but could ultimately end up saving you thousands of dollars over the life of the loan.
  • Repayment frequency - As home loan interest is compounded daily, how often you make repayments will significantly reduce not only the principal amount, but the interest you are yet to pay. For example, switching from monthly repayments to fortnightly home loan repayments may help to reduce the overall cost of the mortgage.
  • Loan term - The period of time you choose to repay the full cost of the loan also plays a role in its affordability. A typical home loan length is around 25 years. A longer loan term, such as 30-40 years, may mean your monthly repayments are smaller, but the total interest you'll pay over the life of the loan can be tens of thousands of dollars higher.

Finding a cheap home loan

When comparing home loans, you'll immediately discover that there are a multitude of loan options and repayment types. From fixed or variable, to interest-only or principal and interest, finding the cheapest home loan may depend on the loan type you choose.

However, there are a few things to keep in mind that, as a rule of thumb, make up the cheapest home loans. 

  • Owner-occupier loans

Owner-occupier home loans typically come with lower interest rates than investor home loans. Lenders claim this is because they believe there's less risk to themselves when the homeowner is living in the home, rather than renting it out. The lower the risk to the lender, the lower the interest rate. 

  • Fixed rate loans

In a low cash rate environment, lenders typically offer cheaper fixed interest rates than variable home loan interest rates. This is because the lender is betting that interest rates could fall further and reduce their variable interest rates at greater numbers. If more borrowers are locked into fixed rates when a bank is forced to cut its variable rate home loans, the banks will still maintain some profits.

Australia has been in a low cash rate environment for several years now. And while no one can predict the bottom of the market, locking in a low fixed rate now could mean you have one of the cheapest home loans despite how rates may change in the future. 

  • Principal & interest loans

Lenders also offer cheaper home loans for borrowers paying principal & interest versus interest only. This is because the loan repayments on a principal and interest mortgage are actually chipping away at the outstanding debt. If you're only paying interest, but your principal (loan amount) is untouched, your debt is also not being reduced. 

This, again, all comes back to the amount of risk to the lender. If someone on an interest-only loan suddenly cannot meet their loan repayments and defaults, and they've never paid off any of their principal, the impact on the lender is much more severe. 

  • New home loan customers

Whether you're a first home buyer or looking to refinance, lenders also typically reserve their cheapest rates for new customers. This is also called the 'loyalty tax', as home loan lenders will use cheap rates to entice new customers onto their books, while keeping existing customers on higher rates. Generally, if you want a cheaper rate from your existing lender you'll either need to call them up and demand it, or make yourself a new customer and refinance. 

  • Deposit size / loan-to-value ratio (LVR)

Another factor to consider when searching for your cheapest home loan is the loan-to-value ratio (LVR). This is the difference between the amount you're borrowing from the bank and the value of the property, generally represented as a percentage. For example, if you've saved a 10 per cent deposit for a home loan, your LVR would be 90 per cent when you purchase a property. 

Commonly, the lower the LVR, the cheaper the mortgage. This is because lenders view you as a less risky borrower if:

  1. you're a would-be buyer and have shown you can save a bigger deposit, or
  2. you're a refinancer and have built up some equity in your home.

If you're able to save up a 20 per cent deposit and have an LVR of 80 per cent, you'll also be able to avoid costly Lenders Mortgage Insurance (LMI). This is because if you have a higher LVR, you're seen to carry a greater risk. LMI is an additional insurance cost paid to the lender that helps to protect them at the risk you'll default.

How to compare cheap home loans

The best way to compare cheap home loans is to use comparison tools, such as comparison rates, comparison tables and calculators.

  • Comparison rates - Allow you to get a more realistic picture of what a home loan will cost. If you just look at the advertised interest rate against a potential loan amount, you'll be searching with a blind spot. Comparison rates also factor in any loan fees to give you a better picture of what your repayments may look like.
  • Comparison tables - There are hundreds of home loans in the Australian market. Comparison tables, such as the one on this page, can help you to compare apples with apples. By allowing you to filter down the loan amount, loan type, and any features you may want, you can best compare home loans that suit your specific budget and needs.
  • Home loan calculators - Calculators, such as mortgage repayment calculators or refinance calculators, can help give you a better picture of how a mortgage may fit into your financial situation. Once you've narrowed down your shortlist of home loans, putting their comparison rates into a calculator can show you what the potential loan repayments will look like, and if that fits into your budget.

Can I get a cheap home loan if I have a bad credit history?

Another aspect that may play into the interest rate you're offered is your credit score and credit history. Cheap home loans for borrowers with bad credit history can be challenging to find. This is again all about the risk to the lender. Borrowers with excellent credit will be seen as a safer option, and more likely be rewarded with lower home loan rates. 

If you find yourself in this situation, spend some time building up your credit history, or look at lenders who specialise in non-conforming loans or low-doc loans.

If you spend some time comparing the options, you may find something that fits your budget and saves you money. Beware that you will often be charged a higher interest rate as you will be considered a risky borrower by the lending institution.

If you're not sure if you'll qualify for one of the lower rate home loans on the market, it may be worth reaching out to a mortgage broker for additional help and  information.