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How do mortgage interest rates affect your home loan's health?

One reason to conduct regular home loan health checks is because a seemingly small difference in mortgage rates can make a big difference over the term of a loan.

Some people don't refinance their mortgage because they don't compare mortgage rates and realise there are lower-rate options on the market.

Other people never get around to refinancing because they keep telling themselves, "There's no rush, I'm only paying a few dollars extra per month”.

However, a small reduction in monthly repayments can add up to a saving in total costs over the life of the loan.

For example, imagine you have 20 years left on your mortgage and you manage to refinance from a home loan with an interest rate of 4.50 per cent to one at 4.00 per cent. Here’s how much you could save based on an outstanding loan of $300,000, $500,000 or $700,000:

  $300,000 $500,000  $700,000 
Total repayments at 4.50 per cent $455,508 $759,179 $1,062,851
Total repayments at 4.00 per cent $436,306 $727,176 $1,018,047
Savings $19,202 $32,003 $44,804

Hypothetical examples are for illustrative purposes only. Does not account for fees or interest rate changes over time. Source: MoneySmart

The cheapest loan isn't necessarily the best loan, but the interest rate is always an important factor when assessing the pros and cons of a mortgage.

By conducting a home loan health check, you can not only get an idea of how your home loan interest rate compares to the rest of the market, but you can also consider several alternative mortgage options.

Watch out for honeymoon rates

When you’re comparing home loan interest rates, check to see whether the lender’s low rate comes from a discount available as an introductory offer. Once this initial “honeymoon” period expires, the loan may revert to a higher interest rate, resulting in higher repayments.

Fees in your home loan health check

Conducting a home loan health check shouldn't mean just comparing mortgage interest rates. It's also important to look at home loan fees.

Many home loans come with ongoing fees, which can include:

  • monthly fees
  • annual fees
  • offset account fees 

Borrowers can also be slugged with fees for making use of some home loan features, like redrawing funds or making additional repayments.

Some lenders also get you on the way out by charging a discharge fee when you finally close the loan.

Fees can be a bit like interest rates in that paying a bit more in the short term can lead to a paying a lot more over the loan's full term. 

Imagine that you had 20 years left on your mortgage and you switched to a home loan with lower fees. Here’s how those savings can add up:

  • $100 per year = $2,000 over 20 years
  • $200 per year = $4,000 over 20 years
  • $300 per year = $6,000 over 20 years
  • $400 per year = $8,000 over 20 years
  • $500 per year = $10,000 over 20 years

Still not convinced about the benefits of a home loan health check?

Features in your home loan health check

Does your home loan offer the kind of features and benefits that could make managing your finances quicker and easier? 

A few examples include:

  • Extra repayments: Paying more than the minimum required amount onto your home loan can shrink your home loan principal, paying off your property faster and helping you save on interest charges. 
  • Redraw facility: This flexible feature gives you the option to take any extra repayments you make onto your home loan back out of your mortgage again if you need the cash. 
  • Offset account: A savings or transaction account linked to your home loan. Money saved in this account is used to “offset” your mortgage principal, so you can be charged less interest. For example, if you owe $300,000 on your mortgage, and have $20,000 saved in your offset account, you’ll be charged interest as if you only had $280,000 owing. 

Similarly, if you’re not getting a lot of use out of your current home loan’s features and benefits, refinancing to a more basic “no frills” home loan could mean enjoying a lower interest rate and/or cheaper fees. 

Home loan package deals

Some banks and mortgage lenders offer home loan bundles, which combine a home loan with a transaction account, credit card, or other financial products, and let you benefit from a discount on the lot.

How to refinance a mortgage

Once you've done a home loan health check and mortgage rate comparison, if you decide you do want to switch home loans, you'll have to refinance your mortgage.

How refinancing works: 

  1. Imagine you have a mortgage with Lender X, with an interest rate of 4.50%, outstanding debt of $300,000, and a remaining loan term of 20 years.
  2. After comparing more than 100 lenders, you decide you like the look of Lender Y, which is offering a similar home loan to Lender X, but with a mortgage interest rate of just 4.00%.
  3. If you decide to refinance, Lender Y would repay your debt to Lender X – you would owe nothing to your old lender, and instead owe $300,000 to your new lender.

However, before you sign on any dotted lines, it’s important to ask yourself a few questions, such as:

Did you check the comparison rate?

When you make a home loan comparison as part of a home loan health check, it’s important to consider the 'comparison rate', and not just the 'advertised rate'.

A home loan’s advertised rate only indicates the cost of mortgage interest, and doesn't include fees or other charges. Sometimes a home loan with a low interest rate but high fees can actually cost more over the long term than a home loan with a higher interest rate and low or no fees. 

A home loan’s comparison rate combines its interest rate with the cost of its standard fees and charges, giving you a better idea of its total overall cost. This can provide a quick and simple way to compare home loans and provide a better idea of which offers may cost more over the long term.  

With some loans, there will be no gap between the advertised and comparison rates, while others will have a significant gap of one percentage point or more.

Will you need to pay fees? And what for?

If you do refinance, you may have to pay a range of fees to both lenders. 

Your old lender may slug you with a discharge fee, and if you're exiting a fixed-rate loan ahead of schedule, you will probably have to pay break costs as well.

Your new lender will probably charge you any combination of standard set-up fees – establishment fee, valuation fee and settlement costs. All these fees could easily add up to more than $1000.

Has your property’s value fallen?

If your property is located in an area where values have fallen in recent years, refinancing could potentially cost you more money than you expect.  

For example, imagine that when you bought the property it cost you $500,000 and you borrowed $400,000. That would have given you a loan-to-value ratio (LVR) of 80% and allowed you to avoid paying Lenders Mortgage Insurance (LMI), which is generally only charged if you have an LVR above 80%.

Now imagine that two years later, you've decided to refinance, having reduced your debt to $385,000 – but you’ve also seen the value of your property fall to $475,000.

When Lender Y values your property as part of the refinancing process, it will discover that your LVR is now 81% and charge you LMI, which could cost you thousands.

Are you refinancing into a longer home loan?

When you refinance, you may want to check if your new loan term matches your old one. The default loan term for many mortgages is 30 years, so if you're not careful, you could accidentally exit from a mortgage that has 20 years left to run with Lender X, and sign up for a new 30-year mortgage with Lender Y.

A longer loan term means you’ll be in debt and paying interest for longer. This could end up costing you more money, even if the mortgage interest rate is lower: 

  • The total repayments for a $300,000 mortgage over 20 years at 4.50% is $455,508
  •  The total repayments for a $300,000 mortgage over 30 years at 4.00% is $515,609
  • That's a difference of over $60,000!

Hypothetical examples are for illustrative purposes only. Does not account for fees or interest rate changes over time. Source: MoneySmart.

You could save tens of thousands

Conducting regular home loan health checks is a no-brainer. Comparing home loans is quick, simple and free, plus there's no obligation to refinance.

Conducting your own home loan health check might reveal that there are alternative loans out there with mortgage rates, fees and features that could save you literally tens of thousands of dollars over the lifetime of your loan.

If you’d like some help conducting your home loan health check, you could consider contacting a mortgage broker. These home loan experts can look at your current home loan and financial situation and make personal recommendations of mortgage offers that may better suit your goals and situation, including exclusive home loan deals that aren’t typically advertised. 

Frequently asked questions

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.

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 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.

How much money can I borrow for a home loan?

Tip: You can use RateCity how much can I borrow calculator to get a quick answer.

How much money you can borrow for a home loan will depend on a number of factors including your employment status, your income (and your partner’s income if you are taking out a joint loan), the size of your deposit, your living expenses and any other debt you might hold, including credit cards. 

A good place to start is to work out how much you can afford to make in monthly repayments, factoring in a buffer of at least 2 – 3 per cent to allow for interest rate rises along the way. You’ll also need to factor in additional costs that come with purchasing a property such as stamp duty, legal fees, building inspections, strata or council fees.

If you are planning on renting the property, you can factor in the expected rental income to help offset the mortgage, but again it’s prudent to add a significant buffer to allow for rental management fees, maintenance costs and short periods of no rental income when tenants move out. It’s also wise to factor in changes in personal circumstances – the typical home loan lasts for around 30 years and a lot can happen between now and then.

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.

How long should I have my mortgage for?

The standard length of a mortgage is between 25-30 years however they can be as long as 40 years and as few as one. There is a benefit to having a shorter mortgage as the faster you pay off the amount you owe, the less you’ll pay your bank in interest.

Of course, shorter mortgages will require higher monthly payments so plug the numbers into a mortgage calculator to find out how many years you can potentially shave off your budget.

For example monthly repayments on a $500,000 over 25 years with an interest rate of 5% are $2923. On the same loan with the same interest rate over 30 years repayments would be $2684 a month. At first blush, the 30 year mortgage sounds great with significantly lower monthly repayments but remember, stretching your loan out by an extra five years will see you hand over $89,396 in interest repayments to your bank.

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.

What is an investment loan?

An investment loan is a home loan that is taken out to purchase a property purely for investment purposes. This means that the purchaser will not be living in the property but will instead rent it out or simply retain it for purposes of capital growth.

Which mortgage is the best for me?

The best mortgage to suit your needs will vary depending on your individual circumstances. If you want to be mortgage free as soon as possible, consider taking out a mortgage with a shorter term, such as 25 years as opposed to 30 years, and make the highest possible mortgage repayments. You might also want to consider a loan with an offset facility to help reduce costs. Investors, on the other hand, might have different objectives so the choice of loan will differ.

Whether you decide on a fixed or variable interest rate will depend on your own preference for stability in repayment amounts, and flexibility when it comes to features.

If you do not have a deposit or will not be in a financial position to make large repayments right away you may wish to consider asking a parent to be a guarantor or looking at interest only loans. Again, which one of these options suits you best is reliant on many factors and you should seek professional advice if you are unsure which mortgage will suit you best.

What is 'principal and interest'?

‘Principal and interest’ loans are the most common type of home loans on the market. The principal part of the loan is the initial sum lent to the customer and the interest is the money paid on top of this, at the agreed interest rate, until the end of the loan.

By reducing the principal amount, the total of interest charged will also become smaller until eventually the debt is paid off in full.

How can I negotiate a better home loan rate?

Negotiating with your bank can seem like a daunting task but if you have been a loyal customer with plenty of equity built up then you hold more power than you think. It’s highly likely your current lender won’t want to let your business go without a fight so if you do your research and find out what other banks are offering new customers you might be able to negotiate a reduction in interest rate, or a reduction in fees with your existing lender.

How do I find out my current interest rate and how much is owing on my loan?

Your bank statements and/or your internet banking should show these details. If you are not sure, call your bank or estimate.

How does a mortgage calculator work?

A mortgage calculator is an extremely helpful tool when planning to take out a home loan and working out the costs. Although each mortgage calculator you come across may be slightly different, most will help you estimate how much your repayments will be. The calculator will often also show you the difference in repayments if you repay weekly, monthly or fortnightly. 

To calculate these figures, you’ll be asked to enter a few details. These include the amount you plan to borrow, whether you’re an owner-occupier or an investor, the proposed interest rate and the home loan term. It will also often show you the total interest you’ll be charged and the total amount you’ll repay over the life of the loan.  

Understanding how the mortgage calculator works, helps you to use it to see how different loan amounts, interest rates and terms affect your repayments. This can then help you choose a home loan that you can repay comfortably and save on interest costs. The mortgage calculator lets you compare the benefits and costs of home loans from different lenders to help you make a more informed choice. Use a mortgage calculator to help identify which home loan is most suitable for your requirements and financial situation.

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.  

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.

 

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.

What is an ongoing fee?

Ongoing fees are any regular payments charged by your lender in addition to the interest they apply including annual fees, monthly account keeping fees and offset fees. The average annual fee is close to $200 however there are almost 2,000 home loan products that don’t charge an annual fee at all. There’s plenty of extra costs when you’re buying a home, such as conveyancing, stamp duty, moving costs, so the more fees you can avoid on your home loan, the better. While $200 might not seem like much in the grand scheme of things, it adds up to $6,000 over the life of a 30 year loan – money which would be much better off either reinvested into your home loan or in your back pocket for the next rainy day.

Example: Anna is tossing up between two different mortgage products. Both have the same variable interest rate, but one has a monthly account keeping fee of $20. By picking the loan with no fees, and investing an extra $20 a month into her loan, Josie will end up shaving 6 months off her 30 year loan and saving over $9,000* in interest repayments.

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.

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.

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.