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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.

Frequently asked questions

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.  

Can I take a personal loan after a home loan?

Are you struggling to pay the deposit for your dream home? A personal loan can help you pay the deposit. The question that may arise in your mind is can I take a home loan after a personal loan, or can you take a personal loan at the same time as a home loan, as it is. The answer is that, yes, provided you can meet the general eligibility criteria for both a personal loan and a home loan, your application should be approved. Those eligibility criteria may include:

  • Higher-income to show repayment capability for both the loans
  • Clear credit history with no delays in bill payments or defaults on debts
  • Zero or minimal current outstanding debt
  • Some amount of savings
  • Proven rent history will be positively perceived by the lenders

A personal loan after or during a home loan may impact serviceability, however, as the numbers can seriously add up. Every loan you avail of increases your monthly installments and the amount you use to repay the personal loan will be considered to lower the money available for the repayment of your home loan.

As to whether you can get a personal loan after your home loan, the answer is a very likely "yes", though it does come with a caveat: as long as you can show sufficient income to repay both the loans on time, you should be able to get that personal loan approved. A personal loan can also help to improve your credit score showing financial discipline and responsibility, which may benefit you with more favorable terms for your home loan.

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.

 

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.

How do I refinance my home loan?

Refinancing your home loan can involve a bit of paperwork but if you are moving on to a lower rate, it can save you thousands of dollars in the long-run. The first step is finding another loan on the market that you think will save you money over time or offer features that your current loan does not have. Once you have selected a couple of loans you are interested in, compare them with your current loan to see if you will save money in the long term on interest rates and fees. Remember to factor in any break fees and set up fees when assessing the cost of switching.

Once you have decided on a new loan it is simply a matter of contacting your existing and future lender to get the new loan set up. Beware that some lenders will revert your loan back to a 25 or 30 year term when you refinance which may mean initial lower repayments but may cost you more in the long run.

When does Commonwealth Bank charge an early exit fee?

When you take out a fixed interest home loan with the Commonwealth Bank, you’re able to lock the interest for a particular period. If the rates change during this period, your repayments remain unchanged. If you break the loan during the fixed interest period, you’ll have to pay the Commonwealth Bank home loan early exit fee and an administrative fee.

The Early Repayment Adjustment (ERA) and Administrative fees are applicable in the following instances:

  • If you switch your loan from fixed interest to variable rate
  • When you apply for a top-up home loan
  • If you repay over and above the annual threshold limit, which is $10,000 per year during the fixed interest period
  • When you prepay the entire outstanding loan balance before the end of the fixed interest duration.

The fee calculation depends on the interest rates, the amount you’ve repaid and the loan size. You can contact the lender to understand more about what you may have to pay. 

Who has the best home loan?

Determining who has the ‘best’ home loan really does depend on your own personal circumstances and requirements. It may be tempting to judge a loan merely on the interest rate but there can be added value in the extras on offer, such as offset and redraw facilities, that aren’t available with all low rate loans.

To determine which loan is the best for you, think about whether you would prefer the consistency of a fixed loan or the flexibility and potential benefits of a variable loan. Then determine which features will be necessary throughout the life of your loan. Thirdly, consider how much you are willing to pay in fees for the loan you want. Once you find the perfect combination of these three elements you are on your way to determining the best loan for you. 

Is a home equity loan secured or unsecured?

Home equity is the difference between its current market price and the outstanding balance on the mortgage loan. The amount you can borrow against the equity in your property is known as a home equity loan.

A home equity loan is secured against your property. It means the lender can recoup your property if you default on the repayments. A secured home equity loan is available at a competitive rate of interest and may be repaid over the long-term. Although a home equity loan is secured, lenders will assess your income, expenses, and other liabilities before approving your application. You’ll also want  a good credit score to qualify for a home equity loan. 

What is an interest-only loan? How do I work out interest-only loan repayments?

An ‘interest-only’ loan is a loan where the borrower is only required to pay back the interest on the loan. Typically, banks will only let lenders do this for a fixed period of time – often five years – however some lenders will be happy to extend this.

Interest-only loans are popular with investors who aren’t keen on putting a lot of capital into their investment property. It is also a handy feature for people who need to reduce their mortgage repayments for a short period of time while they are travelling overseas, or taking time off to look after a new family member, for example.

While moving on to interest-only will make your monthly repayments cheaper, ultimately, you will end up paying your bank thousands of dollars extra in interest to make up for the time where you weren’t paying off the principal.

What is the average length of a home loan?

Most Aussie lenders offer home loans with a 30-year term, meaning that you should pay back the full loan amount and the interest you owe on the amount in 30 years. 

However, home loans can also have a shorter or longer term. They may be as low as ten years or up to 45 years, depending on the product and lender. 

It’s worth remembering that a longer loan term usually means you’ll end up paying a lot more interest in total, but your scheduled repayments may be more manageable. In contrast, you could opt for a shorter loan term if you are comfortable making large repayments in exchange for paying less interest over the term of the loan.

How do I apply for Westpac’s first home buyer loan?

If you’re a first home buyer looking to apply for a home loan with Westpac, they offer an online home loan application. They suggest the application can be completed in about 20 minutes. Based on the information you provide, Westpac will advise you the amount you can borrow and the costs associated with any possible home loan. 

You can use Westpac’s online mortgage calculators to estimate your borrowing power. You can also work out the time it might take to save up for the deposit, and the size of your home loan repayments

When applying for a home loan with Westpac, you’re assigned a home finance manager who can address your concerns and provide information. The manager will also offer guidance on any government grants you may be eligible for. 

Can first home buyers apply for an ING home loan?

First home buyers can apply for an ING home loan, but first, they need to select the most suitable home loan product and calculate the initial deposit on their home loan. 

First-time buyers can also use ING’s online tool to estimate the amount they can borrow. ING offers home loan applicants a free property report to look up property value estimates. 

First home loan applicants struggling to understand the terms used may consider looking up ING’s first home buyer guide. Once the home buyer is ready to apply for the loan, they can complete an online application or call ING at 1800 100 258 during regular business hours.

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.

How much deposit do I need for a home loan from ANZ?

Like other mortgage lenders, ANZ often prefers a home loan deposit of 20 per cent or more of the property value when you’re applying for a home loan. It may be possible to get a home loan with a smaller deposit of 10 per cent or even 5 per cent, but there are a few reasons to consider saving a larger deposit if possible:

  • A larger deposit tells a lender that you’re a great saver, which could help increase the chances of your home loan application getting approved.
  • The more money you pay as a deposit, the less you’ll have to borrow in your home loan. This could mean paying off your loan sooner, and being charged less total interest.
  • If your deposit is less than 20 per cent of the property value, you might incur additional costs, such as Lenders Mortgage Insurance (LMI).

Can I get a home renovation loan with bad credit?

If you're looking for funds to pay for repairs or renovations to your home, but you have a low credit score, you need to carefully consider your options. If you already have a mortgage, a good starting point is to check whether you can redraw money from that. You could also consider applying for a new home loan. 

Before taking out a new loan, it’s good to note that lenders are likely to charge higher interest rates on home repair loans for bad credit customers. Alternatively, they may be willing to lend you a smaller amount than a standard loan. You may also face some challenges with getting your home renovation loan application approved. If you do run into trouble, you can speak to your lender and ask whether they would be willing to approve your application if you have a guarantor or co-signer. You should also explain the reasons behind your bad credit rating and the steps that you’re taking to improve it. 

Consulting a financial advisor or mortgage broker can help you understand your options and make the right choice.

How can I calculate interest on my home loan?

You can calculate the total interest you will pay over the life of your loan by using a mortgage calculator. The calculator will estimate your repayments based on the amount you want to borrow, the interest rate, the length of your loan, whether you are an owner-occupier or an investor and whether you plan to pay ‘principal and interest’ or ‘interest-only’.

If you are buying a new home, the calculator will also help you work out how much you’ll need to pay in stamp duty and other related costs.

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.

How do you qualify for a CBA home loan with casual employment?

Qualifying for a home loan without a full-time job may be challenging, but it can be done. The first step is to understand how a CBA home loan is assessed when you have casual employment.

Most lenders will assess your expenses and savings while checking your loan eligibility, checking on factors crucial to home loan approval, such as if your bills are paid on time and what your credit score presently looks like. 

Your income can be one of the most critical factors to determine your final approved home loan amount. As such, you’ll need to provide payslip copies to lenders to assist them in assessing your income during the loan tenure, regardless of your employment status, full-time, part-time, or otherwise.

Casual employees will want to be casually employed for at least 12 months to be eligible for a home loan. Alternatively, you want to have worked as a permanent casual worker (working for a fixed number of hours per week) for at least one month, or you should have been in your current job for a minimum of three months (if the hours are irregular) to be eligible for the loan.

When do mortgage payments start after settlement?

Generally speaking, your first mortgage payment falls due one month after the settlement date. However, this may vary based on your mortgage terms. You can check the exact date by contacting your lender.

Usually your settlement agent will meet the seller’s representatives to exchange documents at an agreed place and time. The balance purchase price is paid to the seller. The lender will register a mortgage against your title and give you the funds to purchase the new home.

Once the settlement process is complete, the lender allows you to draw down the loan. The loan amount is debited from your loan account. As soon as the settlement paperwork is sorted, you can collect the keys to your new home and work your way through the moving-in checklist.

How is interest charged on a reverse mortgage from IMB Bank?

An IMB Bank reverse mortgage allows you to borrow against your home equity. You can draw down the loan amount as a lump sum, regular income stream, line of credit or a combination. The interest can either be fixed or variable. To understand the current rates, you can check the lender’s website.

No repayments are required as long as you live in the home. If you sell it or move to a senior living facility, the loan must be repaid in full. In some cases, this can also happen after you have died. Generally, the interest rates for reverse mortgages are higher than regular mortgage loans.

The interest is added to the loan amount and it is compounded. It means you’ll pay interest on the interest you accrue. Therefore, the longer you have the loan, the higher is the interest and the amount you’ll have to repay.