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Why you should make a home loan comparison

You wouldn’t buy a property without doing your research and having an inspection first, and the same is true of your home loan. Buying a home is arguably the most expensive purchase you’ll ever make, so it pays to do your research.

This is first and foremost to ensure you choose the most competitive home loan for your financial needs, and don’t end up paying more than you have to. Home loan comparison is one of the best ways you can find your ideal home loan that suits your financial situation and budget.

No two homeowners are identical and there is no one-size-fits-all best home loan as there are multiple types of home loans. There are a range of factors that will influence the home loan you are offered, and the cost of that loan. This includes your personal financial situation and credit history, as well as the value and type of property you want to buy.

When it comes to home loan comparison, a lot of people fall into the trap of just looking at the interest rate. There are also several components of a home loan that can influence how much you’ll pay, including:

  • The loan amount
  • The interest rate
  • The loan type (fixed rate, variable rate or split rate loan)
  • What type of borrower you are (owner-occupier or investor)
  • The features (redraw facility, extra repayments, offset accounts etc.)
  • The fees (upfront fees, ongoing fees etc.)
  • Packages (linked credit cards and transaction accounts)
  • Government assistance (First home buyers may be eligible for stamp duty exemptions and concessions, First Home Owner Grants and more. 

You shouldn’t need a law degree to understand the fine print of a home loan and make your choice. This is why it’s essential you take your time and research the right home loan for you, or even seek external help from a mortgage broker, before you sign on the dotted line.

Comparing big banks and smaller lenders

One of the biggest choices you’ll have to make when choosing your home loan is between a big bank or a smaller lender. You may even have planned on just taking out a loan with your childhood bank, usually one of the big four banks (CBA, Westpac, ANZ or NAB).

However, there are benefits and risks in both options and it’s worth weighing them up before you make a decision.

Advantages of a big bank home loan:

  • Security and familiarity – one of the main reasons Aussies take out a mortgage with one of the bigger banks is that they offer a greater sense of security. Due to their size and influence, there’s a greater sense that they are “too big to fail” and your bank would go belly up. Plus, if it’s your childhood bank then there’s a familiarity in banking where you know.
  • Customer service – Larger financial institutions may be more likely to offer a greater variety of customer service options. Where online lenders and neobanks may be all online-based in how they deal with customers, the bigger institutions can offer branches that allow for face-to-face customer service.

Potential disadvantages of a big bank home loan:

  • Higher rates or fees –RateCity research shows that on average, the big banks generally offer higher ongoing home loan rates than smaller lenders. This is because larger institutions may have greater overheads than their competitors, such as having branches, and smaller lenders can pass the savings by not having said overheads to their customers. Plus, to compete in the home loan market, smaller lenders may battle it out with rock-bottom interest rates and wavied fees, whereas big banks may not need to.
  • Less innovation – Smaller lenders may also be more likely to offer innovation, particularly with fintech. Online lenders and neobanks may draw in customers through their competitive fintech offerings. Comparatively, bigger banks have greater red tape to navigate when it comes to innovation and therefore may be slower to provide this to customers.

How you can compare home loans

When it comes to home loan comparison, a lot of people fall into the trap of just looking at the interest rate. However, there are several components of a home loan that can influence how much you’ll pay, including:

Home loan componentAbout
Loan amountThe principal amount repaid over the life of a home loan. If a borrower purchased a $500,000 house and had a deposit of $50,000, the loan amount would be $450,000.
Interest rateThe amount of interest charged by a lender on your loan principal. The higher the interest rate, the higher your ongoing mortgage repayments. Keep in mind that the interest rate is not the only charge associated with a home loan, and it may be worth looking at the comparison rate for more detail.
Interest rate typeVariable rate - A variable interest rate is subject to market fluctuation and may rise or fall depending on the Reserve Bank of Australia’s cash rate. Variable rate loans may have more access to loan features.

Fixed rate - The borrower locks in an interest rate for a set period, generally 2-5 years. The interest rate will not change, which allows for simplified budgeting.

Split loan - Divide mortgage repayments between fixed and variable rates. For example, a $400,000 loan may be split 70/30 variable to fixed.

Repayment typeBorrowers may choose between principal and interest repayments, or interest-only repayments. As the name suggests, interest-only repayments involve only paying the interest portion of your home loan for a set period (typically 2-5 years).

This option is generally used by investors, as making interest-only repayments lowers their mortgage expenses and increases their net gain - particularly if they sell the property quickly. However, by only paying interest charges, a borrower is not reducing their principal amount. When the interest-only period ends, their repayments will now be higher as their loan term will be shorter.

Borrower typeOwner-occupiers, or those who live in the purchased dwelling, are typically charged low rates compared to investors, as the latter carries a higher level of perceived risk to the lender. However, this gap has begun to shrink over recent years.
Length of loan/loan termThe number of years a borrower repays a mortgage, with a regular home loan term sitting at 25-30 years. The loan term can significantly impact the total interest charged, as well as ongoing repayments. A shorter home loan term (10-20 years) may mean higher mortgage bills, but less interest charged, and vice versa for a longer life of the loan (30-40 years).
Loan featuresThere are a range of home loan features available which can unlock a loan’s potential by allowing borrowers to reduce their repayments or chip away at their debt faster. This may include an offset account, redraw facility and the ability to make extra repayments.
Loan feesHome loan fees can be some of the biggest ongoing costs associated with a mortgage, particularly for borrowers on low interest rates. These may include upfront fees, such as application fees, ongoing fees such as annual fees, and exit fees, such as fixed rate home loan break fees if refinancing.

Get a broker to help your home loan search

What is the comparison rate?

A comparison rate is a combination of a loan’s interest rate with some of its fees and other charges, such as ongoing fees and upfront fees. The comparison rate will combine these fees with the interest rate to create a more “realistic” cost for the loan, based on a 25-year, $150,000 home loan paying principal and interest.

Keep in mind that not every fee is factored into a comparison rate. Plus, a $150,000 home loan is considerably lower than the median dwelling price in capital cities across Australia. So, a comparison rate may not be exactly what you pay for your home loan, but different comparison rates may be a good way to gauge whether one loan has more, or less, ongoing fees.

Tools to help you compare home loans

Does all this information feel overwhelming? Don’t fret, as there are a range of tools available designed to simplify the comparison process for you.

Comparison tables

One of the best ways to compare home loans in Australia is by comparison tables. Search for and compare home loan interest rates from over 100 Australian lenders and use the filtering system to narrow down your options to find a loan, or create a shortlist of options, that suits your specific financial needs. You can then click on one or more loans and select ‘Compare’ to see how the loan stacks up against the big four banks and/or any other loans you may be interested in.

Home loan calculators

To help narrow down your shortlist, a Mortgage Repayment Calculator may aid in showing you estimate of what your mortgage repayments may look like with your loan options. You can then assess this repayment against your income, or even test the repayments at a higher interest rate to ensure you can afford potential rate hikes.

For those beginning their home loan comparison journey, the Borrowing Power Calculator may help to paint a picture of the loan amount a first home buyer may be approved for. This can help prepare them to budget for mortgage repayments, as well as indicate a ballpark property value amount they may afford when purchasing a dwelling. 

Features and flexibility

Interest rates and fees aren’t the only thing consider when comparing your home loan options. If you want a home loan with features such as an offset account, cashback offers, or the flexibility to make additional repayments, you may find that your home loan is a little more expensive than a no-frills, more basic loan without. Sometimes you may need to prioritise choosing a loan that suits your financial needs and offers those features, versus trying to hunt down the cheapest option.

To make this process a little easier, RateCity created the Home Loan Leaderboards which rank some of the most competitive home loans in the marketplace based on our Real Time Ratings™ system.

Unlike other rating systems that grade their products once or twice a year, Real Time Ratings™ results are calculated in real time. This means you get the most up-to-date rating for your comparison. Each home loan is given a score out of five stars, based on loan costs and flexibility. If you see the gold badge on a home loan offer, you can be confident it’s one of the best-rated products in its category on RateCity.

Make your comparison clearer by calculating your mortgage repayments

Repayment Calculator

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How to build your home loan comparison

To help you with your home loan comparison, let’s explore a hypothetical comparison journey for a first home buyer.

Jack and Jill have been diligently saving up a home loan deposit and are ready to purchase their first apartment to live in. First, they use the Borrowing Power Calculator to determine how much they may be able to afford to borrow, based on their income and estimated deposit amount.

Next, they decide to research lenders to determine which to apply for pre-approval with through RateCity’s comparison tables. Using the loan amount estimate they received from the Borrowing Power calculator, plus their deposit size, they narrow down their options.

Jill feels it’s important they can make extra repayments, which may limit them to variable rate home loans, so she includes this feature their filter. Jack loves technology so also limits their comparison to online lenders only, as they may offer more innovation and fintech.

They now have a short list of potential owner-occupied home loan options but want to cut it down so they can get serious about applying. They then look to the Real Time Ratings™ score each loan has and cross off any that aren’t ranked at least 4-stars. Next, they hop on to the Mortgage Repayment Calculator to see which home loan repayments suit their budget and help them to avoid mortgage stress (paying more than 30% of your income towards your mortgage).

Finally, they know exactly which lender to consider applying for. They follow the link to the lender’s page from RateCity and can begin their home loan application.

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.

How do you find cheap home loans?

With so many interest rate options and repayment types available, finding the cheapest home loan may depend on the type of loan you choose.

Whether you’re looking for an owner-occupier or investor loan, with interest-only or principal and interest repayments, on a fixed or variable interest rate, the cheapest home loan rate available may vary greatly.

One way to find the cheapest option for you is to narrow down your search and compare the options that best suit your individual requirements. RateCity’s home loan comparison tables can help you get started on your search and take the hassle out of shopping around.

How do you compare home loans?

To compare home loans, you can assess the components of the loan against your own financial situation and other mortgages in the market.

Look at the interest rate, rate type (fixed or variable), loan fees, features, loan term, repayment frequency and more to find a home loan that fits with your budget and property goals.

Then, use comparison tools like comparison tables, calculators, or RateCity's Real Time RatingsTM to create a short list of home loan options, and decide which home loan best suits your needs.

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.  

This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.