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What is a mortgage rate?

After you successfully apply for a home loan, your bank or mortgage lender will expect you to pay back the money you’ve borrowed (the loan’s ‘principal’) in regular instalments over the rest of the loan term. Each instalment will be made up of a small part of the mortgage principal, plus an extra charge from the lender, called ‘interest’.

The rate at which the lender charges interest is expressed as a percentage. The higher the interest rate, the more a home loan may cost you, both from month to month and in total over the long term. A home loan’s mortgage rate is effectively the ‘cost’ of ’buying’ the money you borrow to buy a property.

A small change to your mortgage rate today can make a big different to the cost of your home loan, both tomorrow and years in the future. This is why it’s important to compare mortgage rates before applying for a home loan, whether you’re buying your first home or refinancing an investment property.

Who changes mortgage rates?

It’s rare to pay the same interest rate on a home loan over its full term. When your lender raises or lowers its variable interest rates, you can expect your home loan repayments to also increase or decrease.

Banks and mortgage lenders adjust their interest rates based on a range of economic factors. An important one is the national cash rate, set by the Reserve Bank of Australia (RBA). Almost every month, the RBA board meets to decide if it will increase Australia’s cash rate, decrease it, or keep it on hold.  

Because the cash rate affects how much it costs for banks and other lenders to provide loans and other financial services, changes to the cash rate often affect home loan interest rates. If the RBA increases the cash rate, your lender may increase your home loan interest rate. And if the RBA cuts the cash rate, your lender may pass on this cut in the form of a discounted mortgage rate.

Do banks and lenders have to follow RBA rate changes?

Banks and mortgage lenders aren’t required to pass on the cash rate changes from the RBA to their customers, though many do. Some lenders may choose to only pass on part of the changes – for example, after a cut to the cash rate, they may decide to only discount rates on selected loan offers, while leaving other home loans with their original interest rates.

Keep in mind that interest rates don’t just affect borrowers with loans; they also affect savers. Cuts to the cash rate could lead to cheaper borrowing but less interest earned on savings accounts and term deposits, while an increasing cash rate could help savers earn more interest while borrowers pay more for their loans. The effect on savers could influence your bank or mortgage lender’s decision whether or not to pass any changes to the national cash rate on to its customers.

How mortgage rates affect your home loan

By comparing mortgage rates, you can see how the lower your home loan’s interest rate, the more you can save in home loan interest charges over time.

For example, imagine you have 20 years left on your mortgage and you refinance from a home loan with an interest rate of 4.50% to one at 4.00%. Here's how much you could save, based on the size of your loan amount: 

$300,000$500,000$700,000
Total repayments at 4.5%$455,508$759,179$1,062,851
Total repayments at 4.0%$436,306$727,176$1,018,047
Potential interest savings$19,202$32,003$44,804

Above hypothetical examples are for illustrative purposes only. Assumes monthly repayments and no fees. Calculations source: MoneySmart

What are the different types of home loan rates?

The right mortgage rates can make an enormous difference to your unique financial situation, whether you're applying for your first home loan, or refinancing an existing mortgage.

The main types of interest rates you may encounter when comparing home loans are:

  • Variable rates;
  • Fixed rates;
  • Split rates, and;
  • Comparison rates.

What are variable mortgage rates?

Many Australian home loans have variable mortgage rates, which rise and fall over the lifetime of the loan, often in line with changes to the national cash rate from the RBA.

By choosing a variable rate home loan, your monthly repayments may be reduced if interest rates are cut, saving you some money and providing you with some financial flexibility. But if interest rates rise, you may find yourself paying more for your mortgage than you initially bargained for, possibly putting you at risk of mortgage stress.

What are fixed mortgage rates?

A fixed rate mortgage keep your interest rate the same for a pre-set length of time (often between 1 and 5 years). This can help to keep your household budgeting nice and simple, as your repayments remain the same from month to month for the duration of the fixed term. You’ll also be insulated from the effects of rising variable rates.

However, if mortgage rates fall, you won't enjoy the benefit of savings on your monthly repayments, as you'll still be locked into your fixed rate. Also, breaking from the predetermined repayment plan can often prove quite expensive in terms of break costs, so you may not enjoy as much financial flexibility from a fixed rate home loan.

What are split mortgage rates?

When you’re choosing between variable or fixed interest rates, some lenders allow you to enjoy the best of both worlds by offering a split rate home loan.

In a split rate mortgage, a fixed rate of interest is charged on a percentage of your loan, and a variable rate of interest is charged on the remainder.

The fixed percentage helps to keep your mortgage repayments relatively stable if rates rise, while the variable percentage allows you to benefit from some savings if mortgage rates fall.

What are comparison rates?

The comparison rate isn't another interest rate option like variable, fixed or split mortgage rates. Instead, it's a figure used to estimate the total cost of the loan during your mortgage rate comparison.

Most lenders charge fees (including upfront fees as well as ongoing fees such as annual fees) as well as interest on their home loans, which can make a big difference to their overall cost. When you compare mortgage rates, you may discover that a mortgage with a low interest rate and high fees can sometimes turn out to be more expensive than a mortgage with a higher interest rate and low or no fees.

To make the total cost of different mortgage offers clearer to borrowers, lenders are required to provide comparison rates for each of their home loans.

A comparison rate combines the interest rate of a mortgage with its standard fees and charges, and expresses the total as a single percentage. This can make comparing the approximate total cost of different home loans side by side much simpler.

It's important to remember that even a home loan's comparison rate may not include every fee and charge. For example, fees associated with optional home loan features may not be included when calculating its comparison rate.

Comparison rates across the mortgage industry are calculated assuming a $150,000 principal and interest mortgage with a 25 year term. While this helps ensure consistency, it also means comparison rates may not always accurately reflect the actual cost of your home loan.

Plus, some home loans come with extra features that can provide additional value, so it’s still important to conduct our own home loan comparison.

How to find your best mortgage rate

You can use a variety of tools and factors to find a mortgage rate you can be happy with, exploring and comparing hundreds of products that could get you a rate you're proud of. Between comparison tables, calculators, brokers, and the various features dotting each home loan option, a mortgage rate comparison is your ticket to understanding the home loan option to suit you best.

Comparison tables

One of the fastest and simplest ways to find a home loan with useful features and benefits, including an affordable interest rate, is to use the comparison tables on a site like RateCity.

Using the table filters, you can enter details of the type of loan you’re looking for, and narrow down your results to the most relevant home loan products. You can then compare the interest rates, fees, features, benefits, Real Time Ratings™ and more of the results.

Once you have a better idea of which home loan deals may best suit your needs, you can learn more about the loan or get in contact with the lender with just a click.

Home loan calculators

Home loan calculators can help you work out the cost of a home loan’s repayments. Entering the size of the loan, the term length and the interest rate can show you how much you can expect to pay for a loan on the property, both from month to month and in total over the long term.

You could also use a mortgage calculator to estimate your borrowing power. By entering a few details of your income, expenses, assets and liabilities, you can get an estimate of how much money a bank may lend you to purchase property.

Mortgage calculators can also be handy for calculating the effect of a few small changes to a home loan. For example, you could see what your repayments would look like if you had a lower interest rate, a shorter loan term, or a higher value property. You could also calculate if you could still comfortably afford our mortgage repayments if variable rates were to rise, and if you’d be able to avoid mortgage stress.

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A guide to mortgage stress

Households suffer mortgage stress when 30% or more of their pre-tax household income is being swallowed by mortgage repayments.

Life becomes stressful at this point because once households have paid for their mortgage, their day-to-day essentials, and other fixed costs, they will have little if any money left over. That's why it's so important to factor in interest rate rises before taking out a mortgage.

Go to a home loan calculator and punch in some numbers. Could you afford the mortgage repayments if interest rates rose by 1, 2 or 3 percentage points? If the answer is no, you may need to think long and hard before you compare mortgage rates and take out a home loan, because a rate change could place you in mortgage stress.

Can't find the right mortgage rate? Find a broker who can.

What else affects your home loan rate?

The interest rate advertised by a mortgage lender isn’t always the rate you’ll get when you apply for a home loan. The interest rate you’ll pay on your mortgage may depend on a variety of factors, including:

Your application

Applying for a home loan involves proving to a lender that you can comfortably afford the repayments, and that the risk of you defaulting on your mortgage is low. You can do so by providing proof of your income and expenses, such as payslips and bank statements. If you can show a lender that you’re a reliable and low-risk borrower, you may be offered a lower interest rate. 

Your deposit

Paying a larger deposit on your property may lead to paying a lower interest rate on your home loan. The more money you can put towards a deposit on a property, the more you can lower the mortgage's loan to value ratio (LVR). This reduces the risk of the lender losing money if it was forced to sell the property after a mortgage default, which could lead to lower interest rates. 

Your credit history

When you apply for a mortgage, the lender will perform a credit check. Because a mortgage is secured by the value of the property being purchased, your credit score may not play as large a role in your home loan application as it might when you’re applying for a personal loan or car loan. That said, if you have an excellent credit score, a lender may be willing to offer a lower interest rate to help secure your business.

Your borrower type

If you’re buying a property to live in as an owner-occupier, you may be offered a lower interest rate than if you were buying a property to rent out as an investor. Most lenders consider owner occupiers to be less likely to default on their repayments, as they have an interest in keeping a roof over their head and making progress towards owning their owner occupied home outright.

Your rate repayment type

If you choose to make principal and interest home loan repayments, you may be offered a lower interest rate than if you were to opt for interest-only repayments for a limited time.

This is because switching to interest-only repayments carries with it the risk that the borrower may be unable to afford the loan once it reverts back to principal and interest repayments, putting them at higher risk of default.

Extra features and benefits

As the old saying goes, you get what you pay for.

Choosing a home loan with a lot of extra features and benefits, such as options for additional repayments, a redraw facility, and an offset account, could mean paying more in interest charges or fees.

Sometimes a low rate "no-frills" home loan can offer greater value than a mortgage with a higher rate and features that you may not end up using. 

How to compare mortgage rates from big banks and other lenders

When comparing interest rates for home loans from Australia’s big banks, it's important to also consider the value these mortgage offer. For example, some banks are able to bundle access to savings and transaction accounts, credit cards, and other features in with a home loan, which may provide extra value to certain customers. Additionally, having a home loan with a big bank may let you benefit from their network of branches and ATMs.

Of course, some banks have relatively strict mortgage lending criteria, offering less flexibility to borrowers in nonconforming financial situations.

It may also be worth comparing home loan deals from non-bank lenders. Some of these non-bank lenders offer competitive mortgage rates, as well as flexible lending terms to better suit households in different financial situations, such as low-doc home loans for self-employed borrowers.

However, these lenders may not be able to provide the same kind of home loan features and services that are available from certain banks. Several non-bank lenders operate online only, meaning they can offer lower interest rates and fees, but don’t offer access to networks of branches or ATMs for managing your home loan in person.

While it's important to compare mortgage rates when selecting a home loan, there's plenty more to consider when looking at mortgage offers from different lenders:

  1. Are you applying for a new home loan, or refinancing an existing mortgage?
  2. Are you an owner occupier or an investor?
  3. Would you prefer a variable, fixed, or split mortgage rate?
  4. What are the fees? Have you looked at the comparison rate?
  5. How long is your loan term? Can you afford the repayments on your income?
  6. What mortgage features do you want? Can you get these, plus an affordable mortgage rate, from a bank or non-bank lender?

RateCity puts information on a wide variety of home loans all in one place, so you can quickly and efficiently compare mortgage rates, features and benefits, and narrow down your shortlist of potential loans to only those that best fit your financial situation.

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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 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 average annual percentage rate?

Also known as the comparison rate, or sometimes the ‘true rate’ of a loan, the average annual percentage rate (AAPR) is used to indicate the overall cost of a loan after considering all the fees, charges and other factors, such as introductory offers and honeymoon rates.

The AAPR is calculated based on a standardised loan amount and loan term, and doesn’t include any extra non-standard charges.

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.

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.

Fact Check Verification

The information on this page was fact checked by Tony Harris, a broker in New South Wales specialising in home loans, go-between loans, and commercial property loans. For more information on how brokers like this can assist you, look for a broker near you