The interest rate you’re offered will likely come down to your lender. You could also expect to pay a higher interest rate depending on whether you’re buying an investment property or a home to live in, planning to make principal and interest repayments or pay interest only, and if you’re looking for a variable or fixed interest rate.
Here are some of the most common home loan factors that can influence the interest rate you are offered:
Principal and interest or interest-only repayments
You may choose to pay both the principal owing and the interest charges or opt for interest-only payments. This can have a considerable impact on your loan costs.
Each principal and interest repayment helps reduce your loan and brings you closer to owning your property outright. However, for a limited time, you may choose to only pay the interest charges and minimise your short-term costs.By selecting interest-only payments, your mortgage repayments will significantly decrease. This payment approach is generally recommended for investors aiming for short-term gains or new buyers who need some breathing room in their budget.
It's important to note that by choosing interest-only payments, your loan amount will not decrease, and it may take longer to pay off your loan. As a result, you may end up paying more interest on your property in total. Further, interest-only mortgages often come with higher interest rates. Lenders apply these rates due to the risk involved, as there's a possibility that borrowers may struggle to afford the loan when it reverts to higher principal and interest repayments.
Fixed or variable interest rate
The interest rate type you choose may also affect the overall cost. Variable interest rates are subject to market fluctuation, with the amount of interest the lender charges influenced by the national cash rate set by the RBA.
If the RBA keeps the cash rate on hold, the amount of interest you pay should remain steady. If the cash rate is cut, your lender may pass the interest cut on to you, reducing your home loan repayments. But if the cash rate is increased, your interest payments should move in tandem, hiking your mortgage repayments.
Fixed rate home loans lock in their mortgage interest rates for typically 1-5 years. This can help to keep your repayments stable and comfortably affordable during the fixed period, which can prove especially valuable to first home buyers hoping to build up their initial equity. However, with one of these fixed home loans, you also won’t benefit from any savings if the RBA lowers the cash rate.
Some lenders offer heavily-discounted introductory rates, or “honeymoon rates”, as a special offer for the early stage of a loan. These typically revert to standard variable interest rates once this introductory period expires. If you don’t take into account the introductory period caveat when planning your budget, you could find yourself paying much more than you expected when it reverts to the higher standard variable rate.
The general rule of thumb is that lenders prefer a 20% upfront deposit, as it shows a strong level of financial responsibility. If you’re looking for a low rate loan, you’ll likely need to save up a larger deposit to help reduce the lender’s risk that you may default on the loan. You may still be qualified for a mortgage with a small deposit of even 5%. However you may pay more for it, whether through a higher interest rate or by paying costly Lender's Mortgage Insurance (LMI).
If you can’t afford a full deposit on the mortgage you’re looking at, there may be other options available to you. If you're still in the early stages of the home buying process, you might like to consider using RateCity's borrowing power calculator for an estimate of how much you may be approved to borrow.
Home loan features
While a low interest home loan can be competitive, some borrowers may prefer to pay a little extra for helpful features, such as an offset account, a redraw facility, or the ability to make extra repayments. Many home loan features can help borrowers to reduce the interest charged on their mortgages or chip away at their principal owing faster. If this is more important to you than a lower rate, it may be worth considering prioritising a home loan with features.