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Compare home loans with interest rates under 2%

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Why are low home loan rates important?

There are two types of home loan repayments: principal and interest or interest-only. Regardless of the type you choose, you’ll always end up paying interest to the lender for the privilege of having a loan with them. This, as well as fees and other ongoing costs, is how a lender makes money. 

A low interest rate, while not the only important cost of a home loan, is essentially the biggest determining factor for how much you’ll pay on an ongoing basis. Typically, the higher the interest rate, the higher your mortgage repayments will be. This is why it can literally pay to have a low home loan rate.

However, it’s not just your interest rate that determines your ongoing mortgage costs. It may also be helpful to keep fees and other ongoing costs down too. Take a look at the product disclosure statement for any home loan to get a good breakdown of these potential costs.

Why do we have home loan rates lower than 2 per cent?

Long-time homeowners may remember when the early ‘90s recession made it common for mortgage rates to sit around 15 per cent. So how do we have home loan rates under 2 per cent?

This is because home loan interest rates are determined by both the Reserve Bank of Australia’s cash rate, and the lender. Meaning, home loan rates are influenced by the Australian economy and subject to fluctuations in the market.

The Reserve Bank of Australia (RBA) board meet every first Tuesday of the month (besides January) to set the cash rate. There, they will make the decision to raise, lower or hold the cash rate, depending on how the Australian economy is looking.

The cash rate has fallen from 17.50 per cent in January 1990 to nearly zero per cent in 2020. This has created a perfect environment for home loan interest rates to plummet to historic lows.

The theory is that a cash rate cut can help in a few ways:

  • To reduce the biggest bill of most Australian households – their mortgage. Borrowers have more money to inject back into the economy.
  • To allow businesses to borrow money more cheaply to expand or hire more staff, helping to stimulate the economy.

Hiking the cash rate, however, is not necessarily a bad thing. It can be a necessity to prevent an economy from hyperinflation if it is growing at too rapid a rate.

Regardless of how the RBA acts, lenders will typically follow suit, hiking or dropping home loan rates. For variable home loan rates, this change can in many cases be immediate for your repayments.

For fixed home loan rates, you may be saved (for the length of your fixed term) from an increase in your repayments if the cash rate is hiked or miss out on a rate cut for said term if the cash rate is cut. Once you reach the end of your fixed term, you’ll find that lenders have moved fixed rates depending on how the cash rate has fluctuated over said term.

How much money could a low home loan rate save you?

Whether you wait for your bank to cut your mortgage rate, or you refinance to a lower rate loan, seeking out those savings may save you big time on your mortgage repayments.

For example, on a 30-year $500,000 home loan, the difference between an interest rate of 3 per cent versus 1.99 per cent amounts to $262 a month. This can make a serious difference in the budget of a typical Australian household and could potentially be put towards groceries or energy bills.

Different repayments on a $500,000 home loan

Interest rateMonthly repaymentsLoan repayments over one year
Loan A1.99%$2,108$25,296
Loan B3.00%$1,846$22,152
Difference-1.01%$262$3,114

Note: Based on $500k home loan over 30-years. Calculations do not factor in fees.

However, there are instances where a loan with a higher rate will cost you less over the life of the loan. This is due to the other determining factor of your home loan cost: the fees. A low-rate home loan with high upfront and annual fees may cost you more over time than a home loan with zero upfront and annual fees.

This is why it is crucial to compare not only the interest rate of a home loan, but the potential fees and ongoing costs as well.

How to get a home loan rate under 2 per cent

If you’re concerned your lender isn’t offering you the most competitive deal out there, or you’ve seen a much lower interest rate advertised and are considering refinancing, here is what you need to know to try and nab that lower rate.

  1. Find your current rate. To find your current home loan rate, simply download a copy of your latest mortgage statement. This will show you the current interest rate, as well as current balance left to pay. Once you have your interest rate, you can begin the comparison process.
  2. See what your lender is offering new customers. It can be much easier to ask for a lower rate than to refinance your mortgage. Simply hop online to a comparison site or your lender’s website and look at what low rates are being offered to new customers. Lenders will typically offer more competitive rates to new customers to entice them onto their books, while you’re left paying higher rates. This is called the ‘loyalty tax’ and is common across many, if not all, mortgage lenders.
  3. See what other lenders are offering. Your next step will be to use comparison tables, like the one on this page, to find what interest rates competitors are offering new customers. Keep an eye out for potential fees and costs, and use a mortgage calculator to make a short list of more affordable options to use in your negotiation, or to potentially refinance to.
  4. Call your lender and ask for a rate cut. Let them know you’re aware what new customers are being offered and demand that rate. If that doesn’t work, advise that other lenders are offering better rates and you’ll leave your lender if they can’t reduce your repayments. If they still don’t budge, threaten to leave (but only if you’re not locked into a fixed rate or still tied to your mortgage due to another condition, as you may face high fees and penalties). You’d be surprised how far you can get by saying three simple words: “mortgage discharge form”.
  5. Consider refinancing. If your lender absolutely refuses to offer you a lower rate, it may be time to consider looking at your competitor short list and refinancing. Sometimes giving yourself a rate cut through refinancing is the easiest way to get a rate cut. After all, if your bank is charging you more for your loyalty, why stay loyal to begin with?

Frequently asked questions

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.

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.

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.

If a mortgage rate changes, will it affect your repayments?

If you have a variable rate home loan, changes to your mortgage rate may affect the cost of your repayments. Rising interest rate could cost you more in interest charges, while interest rate cuts could see you paying less interest on your home loan.

If you have a fixed rate home loan, your interest charges will stay the same during the fixed interest period, regardless of whether the lender’s variable rates rise or fall. Once the fixed rate term expires, your loan will revert to a variable rate, so be prepared in case of bill shock.

Is the lowest home loan rate always the cheapest?

The home loan with the lowest interest rate may not always be the cheapest mortgage option for you. Sometimes a home loan with a low interest rate may charge high fees, which may cost more in total than a mortgage with a higher interest rate and no fees.

Consider checking the comparison rate, which combines interest and standard fees, to get a better idea of the overall cost of different home loan options.

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. 

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 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 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 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*

Are fixed rates or variable rates cheaper?

Fixed and variable home loan interest rates are discretionary based on the lender’s decision. They will also be influenced by the Australian economy, as well as the Reserve Bank of Australia’s cash rate. The specific interest rate you may be offered will also depend on your credit history and financial situation.

Whether a fixed or variable rate home loan is the cheaper option for you will depend on all the above, and may still fluctuate over a 25-year home loan term. Therefore, it’s worth comparing your loan options with our comparison tables to see how the rates compare, based on your specific financial needs.

How often do mortgage rates change?

Mortgage interest rates change based on two main factors: changes to the Reserve Bank of Australia’s (RBA) cash rate, and out-of-cycle rate hikes from your lender.

Generally, your home loan lender will change its mortgage rates in alignment with the RBA’s cash rate. On the first Tuesday of each month (excluding January) the RBA meets to decide whether the cash rate should increase, decrease, or stay on hold. If the cash rate changes, a lender’s variable interest rates should change in tandem.

Lenders may also change interest rates out-of-cycle with the RBA cash rate, with fixed rates and variable rates frequently hiked and cut at the lender’s discretion. To stay on top of changing mortgage rates, read the latest home loan news.

Who sets mortgage rates?

Mortgage rates are influenced by the official cash rate, which is determined by the Reserve Bank of Australia (RBA) at its monthly board meeting on the first Tuesday of every month, except for January.

The official cash rate is the interest rate that banks charge other banks to borrow money. If the RBA cuts the cash rate, the interest rate banks are charged when they borrow from other banks is reduced. Likewise, if the cash rate is hiked, the interest rate banks are charged will go up.

If banks can save money from reduced interest rates, they will often pass on some or all of these savings to their variable rate home loan customers – although they are not required to. They can also choose to pass on a cash rate rise by increasing mortgage interest rates.

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.

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 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 are the features of home loans for expats from Westpac?

If you’re an Australian citizen living and working abroad, you can borrow to buy a property in Australia. With a Westpac non-resident home loan, you can borrow up to 80 per cent of the property value to purchase a property whilst living overseas. The minimum loan amount for these loans is $25,000, with a maximum loan term of 30 years.

The interest rates and other fees for Westpac non-resident home loans are the same as regular home loans offered to borrowers living in Australia. You’ll have to submit proof of income, six-month bank statements, an employment letter, and your last two payslips. You may also be required to submit a copy of your passport and visa that shows you’re allowed to live and work abroad.

Why does Westpac charge an early termination fee for home loans?

The Westpac home loan early termination fee or break cost is applicable if you have a fixed rate home loan and repay part of or the whole outstanding amount before the fixed period ends. If you’re switching between products before the fixed period ends, you’ll pay a switching break cost and an administrative fee. 

The Westpac home loan early termination fee may not apply if you repay an amount below the prepayment threshold. The prepayment threshold is the amount Westpac allows you to repay during the fixed period outside your regular repayments.

Westpac charges this fee because when you take out a home loan, the bank borrows the funds with wholesale rates available to banks and lenders. Westpac will then work out your interest rate based on you making regular repayments for a fixed period. If you repay before this period ends, the lender may incur a loss if there is any change in the wholesale rate of interest.

Cash or mortgage – which is more suitable to buy an investment property?

Deciding whether to buy an investment property with cash or a mortgage is a matter or personal choice and will often depend on your financial situation. Using cash may seem logical if you have the money in reserve and it can allow you to later use the equity in your home. However, there may be other factors to think about, such as whether there are other debts to pay down and whether it will tie up all of your spare cash. Again, it’s a personal choice and may be worth seeking personal advice.

A mortgage is a popular option for people who don’t have enough cash in the bank to pay for an investment property. Sometimes when you take out a mortgage you can offset your loan interest against the rental income you may earn. The rental income can also help to pay down the loan.