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Finding a home loan with a good interest rate
Finding a low interest rate can be as simple as looking at a list of home loans and sorting them by their rates, and building a home loan comparison. However, the home loan with the lowest interest rate may not be the best mortgage for you.
To get a home loan that suits your needs, it’s important to compare a variety of options. Consider their interest rates, but also their fees and other features and benefits to find the best home loan for you. Start by making your very own home loan comparison right now.
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Who provides the best home loan deals?
You could get a home loan simply by contacting your local bank, but there are many more options available, including:
- other large and small banks
- mutual banks
- building societies
- credit unions
- other non-bank lenders
The best mortgage lender for you will be the one offering a home loan with rates, fees, features and benefits that suit your needs.
Some banks offer home loan package deals, letting you bundle a mortgage with a bank account, credit card, and other financial services. This may offer more value than managing these accounts separately.
Some customer-owned banks even specialise in looking after people living in a particular area (such as a rural region), or working in a specialised profession (such as teaching or nursing). These customers may be able to enjoy special benefits, though other Australians can often also apply for home loans from these banks.
Online-only mortgage lenders can be convenient if you’d prefer to manage your home loan online or over the phone. Because these lenders don’t have branches, they can often offer more affordable mortgage deals.
Many different lenders offer special home loan deals, such as discounted interest rates, waived fees, or cashback offers. These introductory offers can be useful, as long as you keep any terms and conditions in mind.
What are the different types of home loans?
There is no ‘one size fits all’ home loan. Different types of home loans offer different features and benefits, and may be better suited to different borrowers.
Owner Occupier home loans and Investor home loans
If you’re buying a property to live in, you’re an owner-occupier. If you’re buying a property to earn money from rent and/or capital growth, you’re an investor. Investors and owner-occupiers use different types of home loans to reach their personal and financial goals.
Owner occupier home loans often have lower interest rates and fees than investor home loans. This is because most banks feel that owner occupier loans are less risky than investor loans. After all, an owner occupier is motivated to pay their mortgage and keep a roof over their head!
Investor home loans may have higher interest rates and fees than owner occupier home loans. However they may also offer flexible special features and other benefits that may be useful to investors, such as longer interest-only periods.
Principal & Interest and Interest Only home loans
A home loan’s “principal” is the money you’ve borrowed and need to pay back. In most home loans, each of your repayments will be made up of part of the principal, plus an interest charge based on the remaining amount still owing. Each repayment will bring you one step closer to paying off your mortgage and owning your home outright.
Some lenders will let you just pay the interest on your mortgage for a limited time, such as from one and five years, or longer for investors. This helps make your mortgage more affordable from month to month, relieving some pressure on your budget.
However, because interest-only payments won’t reduce your principal, your loan will likely take longer to pay off, meaning you’ll end up paying more interest in total. It’s also important to watch out for bill shock when your mortgage reverts back to principal and interest repayments at the end of the interest-only period.
Variable Rate and Fixed Rate home loans
Even if you choose a home loan with a low interest rate, the rate you’ll pay at the start of your loan may not be the same rate you’ll be paying at the end of your loan.
Most home loans charge interest at a variable rate. Your lender may increase or decrease its variable interest rates, depending on the economy. If your lender lowers rates, your minimum mortgage repayments will cost less from month to month. But if your lender raises rates, you’ll need to pay more.
You may be able to fix your home loan interest rate for a limited time, such as from one to five years. During this period, your interest charges will stay the same, even if your lender changes its variable rates. This keeps your payments consistent for simpler budgeting, and you won’t be charged extra if your lender raises variable rates. However, you’ll also miss out on interest savings if your lender cuts variable rates. It’s also important to watch out for bill shock when your loan reverts to a variable rate.
What options and features are available on home loans?
A home loan with the right features and benefits can make a big difference to your lifestyle, and may help you achieve your goals.
While there are a wide range of features available from mortgage providers, three of the most popular are extra repayments, redraw facilities, and offset accounts.
If you pay more than the required minimum onto your mortgage each month, the extra money will go directly onto your loan’s principal, reducing the amount you owe. Because your interest charges are calculated based on your current principal, extra repayments can help you to pay less interest, clear your debt faster, and own your home outright sooner.
Certain home loans don’t allow extra repayments, or limit how much extra money you can put on your mortgage. For example, if you have a fixed rate home loan, you may need to stick to a predetermined payment plan. Check with your lender before you apply.
Some home loans will let you “redraw” any extra repayments you’ve made on your home loan. This can help you confidently put part of your savings towards paying off your home loan and lowering your interest charges, as you can still put this money back in your pocket if you need it.
Keep in mind that some banks charge redraw fees, limit how much you can redraw from your home loan’s extra repayments, or limit the number of redraws you can make per year. Check the terms and conditions before you apply.
An offset account is a savings or transaction bank account that’s linked to your home loan. Any money in this account is used to “offset” your mortgage when interest is calculated on your loan.
For example, if you owed $300,000 on your mortgage, and had an offset account holding $10,000, the bank would calculate interest on your home loan as if you only owed $290,000. This can help you save money on interest charges.
Remember that the more features a home loan includes, the more likely it is to charge higher interest rates and fees. Compare the potential value of a home loan’s features to the extra costs you may need to pay.
How much can I borrow for a mortgage?
Before applying for a home loan, it’s important to get an idea of how much you can afford to borrow and comfortably pay back. If you apply to borrow too much money, you risk ending up in mortgage stress, meaning the lender may decline your mortgage application.
What is mortgage stress?
Mortgage stress is when you’re at risk of being unable to afford your mortgage payments if you’re hit with surprise expenses, such as car repairs or medical bills.
Different lenders define mortgage stress differently. One popular benchmark is when more than one-third of your household income is going towards your mortgage.
You can use a mortgage calculator to find out how much you can borrow, simply by entering some details of your income and expenses. Alternatively, you could enter your preferred loan size, term length and interest rate to calculate the repayments, then work out if you can afford the loan on your current budget.
How much do I need for a home loan deposit?
The more you can afford to pay as an upfront deposit on a property, the better the home loan deal you may be offered. Many home loans with low rates and special features will ask for a deposit of 20 per cent or more of the property’s value.
You may be able to get a home loan with a smaller deposit of 10 per cent or even 5 per cent of the property’s value. While you can save up a smaller deposit much faster, a deposit of less than 20 per cent usually means you’ll need to pay for Lenders Mortgage Insurance (LMI), which can be expensive.
What is LMI?
Lenders Mortgage Insurance (LMI) is an insurance policy that covers the risk of a borrower defaulting on their home loan repayments. LMI only protects the lender providing your mortgage, and does NOT protect you, the borrower (that’s what mortgage insurance and/or income insurance is for).
LMI is typically required if you’re borrowing more than 80 per cent of a property’s value in your mortgage, and paying a deposit of less than 20 per cent This is sometimes called having a Loan to Value Ratio (LVR) of 80 per cent or less.
LMI can add thousands to tens of thousands of dollars to your mortgage’s upfront costs. The higher your mortgage’s LVR, the more you may need to pay in LMI. Before you apply for a low deposit home loan, consider using an LMI calculator to estimate the costs.
Who do I need to speak to when applying for a home loan?
If you’ve done your research with mortgage comparisons, and know the home loan you want from a bank or mortgage lender, you could visit a branch, give them a call, or even chat online. Some mortgage providers also offer mobile lending services, where someone will come and meet with you to discuss your application.
If you’d like more help choosing a home loan, you may want to contact a mortgage broker. These experts can look at your personal finances and recommend specific home loans for you. They can also negotiate with lenders on your behalf to help you get a better deal, and may have access to special home loan offers that aren’t normally advertised.
Visiting a mortgage broker is usually free. Rather than charging fees to borrowers, most mortgage brokers are paid commissions by banks when they successfully sign up new home loan customers. But even though brokers are paid by banks, they work for borrowers. If you’re worried that a broker‘s commissions may be influencing their recommendations, ask them how they’d be paid for different home loans.
Step by step – How to get a home loan
- Collect financial documents (e.g. payslips, bank statements, bills etc.) to confirm your income and expenses.
- Fill out a lender’s mortgage application form.
- Get pre-approval, where a lender agrees in principle to provide a loan, but you or the lender can still walk away.
- Make an offer on a property.
- Credit check and valuation. The lender will check your credit score (based on your history of managing money), and calculate the value of the property to make sure you haven’t over-borrowed.
- If your application is approved, sign the formal home loan offer and contract.
- Prepare for settlement, which is the legal transfer of the property from one owner to another. A solicitor or conveyancer can help confirm that everything is done correctly.
- That’s it! Time to move in, or start looking for tenants.
What is a cooling off period?
A cooling off period is a length of time that follows signing a contract to purchase property, during which a buyer can choose to terminate the agreement without being in breach of contract and losing their deposit. This gives you a window of opportunity to change your mind about a property purchase if your circumstances change, or you decide it’s not right for you.
For example, if you signed a contract with a five-day cooling off period to buy a house, then changed your mind about the purchase, you could exercise the cooling off period to withdraw from the agreement within five days. You’d get your deposit back (minus a small fee), so you could still go out and make an offer on another property if you wished.
The exact rules around how cooling off periods work varies from state to state, so it’s important to check the facts before you sign on any dotted lines.
How do I refinance a home loan?
Refinancing a home loan means swapping your current mortgage for another. Borrowers refinance for many reasons, including:
- To get a better deal: swap to a mortgage with a lower interest rate, cheaper fees, or more useful features and benefits, and you’ll land the best home loan for your needs.
- To borrow more money: upsize to a bigger house, or renovate your current property.
- To consolidate other debts: add the money you owe money on credit cards, car loans or personal loans onto your mortgage to enjoy a lower interest rate (though you may end up paying more total interest over the long term).
Refinancing a home loan still requires a deposit, but rather than just using your savings, you can use the equity in your current property.
Your equity is the current value of your home, minus the amount you still owe on your mortgage. If you’ve been paying your mortgage for a few years, and your property has increased in value during this time, you may have more equity available than you realise. This may make it easier to refinance to a home loan that better suits your needs.
|AAPR, Comparison Rate or Real Rate||Three ways of saying the same thing. The Average Annual Percentage Rate (AAPR), Comparison Rate and the Real Rate refer to interest rates plus fees and charges rolled into a single percentage rate for ease of comparison|
|Amortising Loan||The most commonly used loan structure for a mortgage, which requires set repayments of principal and interest over a period of time.|
|Break cost||Fees charged by your lender if you exit your loan early, most often applied if you have a fixed interest rate|
|Bridging Finance||Helps you to “bridge” the gap between the sale of one property and the purchase of another.|
|Capped or Tunnel Loans||Capped loans limit how high your loan’s variable interest rate can go, while Tunnel loans limit both how high and low a rate can go.|
|Conveyancing||Conveyancing is the process of transferring legal ownership of a property from one party to another. Legal fees on a property purchase are called conveyancing fees.|
|Deposit||The amount of cash you need to contribute towards your home loan application.|
|Fixed Rate Loan||A mortgage with interest rates that are locked in for a certain period of time.|
|Interest Capitalisation||An option to add interest charges to your total loan balance for a limited time, rather than paying it as you go.|
|Introductory or Honeymoon Rate Loan||A mortgage offering a discounted interest rate for an initial introductory period (the “honeymoon”), before reverting to the higher standard rate.|
|Lenders Mortgage Insurance||LMI safeguards the lender in case a borrower defaults on their mortgage. LMI is typically required for mortgages with an LVR higher than 80% (or a deposit of less than 20%), with the borrower required to pay the cost.|
|Loan to Value Ratio (LVR)||The size of your home loan compared to the value of your property. For example, if you paid a 20% deposit on a property, and took out a mortgage for the remainder of its value, you’d have an LVR of 80%.|
|Mortgage Offset||A saving or transaction account linked to your home loan, which included when calculating interest charges. For example, if you had a $300,000 home loan and a 100% offset account holding $20,000, you’d be charged interest as if you only owed $280,000 on your mortgage.|
|Ongoing Fees||Ongoing fees are charged periodically over the life of the loan.|
|Overdraft||A line of credit, typically secured by the equity in your property, allowing you to borrow extra funds if required.|
|Parental Leave||A type of repayment holiday offered by some lenders when you become a parent|
|Portability||An option to pick up your loan and take it with you when you move houses.|
|Progressive Drawdown||When building a home rather than buying, funds can be accessed in small sums at various intervals to suit the building process, rather than as a single lump sum at the beginning.|
|Redraw||Pay extra money into your loan and withdraw it back if you need it in the future.|
|Refinancing||Taking out a new loan to pay out an old one. Refinancing may allow a borrower to enjoy more favourable interest rates, fees, features or benefits.|
|Repayment Holiday||An option to take a temporary “holiday” from loan repayments when you experience proven hardship, such as an unexpected loss of income.|
|Revolving Line of Credit||Essentially a giant overdraft, where money can be borrowed, repaid, then withdrawn again.|
|Salary Loan||A mortgage where your payments can come directly out of pre-tax income from your employer as a salary sacrifice, which can have tax benefits.|
|Split Loans||A home loan where interest is charged on part of your balance at a fixed rate, and part of your balance at a variable rate, providing you with a mix of security and flexibility.|
|Stamp Duty||Stamp Duty is a State Government tax on the sale and transfer of land and property|
|Switching Fees||The costs and charges involved when refinancing your home loan from one lender to another|
|Upfront Fees||Fees charged at the start of your home loan to help cover the cost of processing your application|
|Variable Rate Loan||A home loan where the lender may raise or lower your interest rate depending on a range of economic factors, including the national cash rate set by the Reserve Bank of Australia.|
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.
A deposit of 20 per cent or more is ideal as it’s typically the amount a lender sees as ‘safe’. Being a safe borrower is a good position to be in as you’ll have a range of lenders to pick from, with some likely to offer up a lower interest rate as a reward. Additionally, a deposit of over 20 per cent usually eliminates the need for lender’s mortgage insurance (LMI) which can add thousands to the cost of buying your home.
While you can get a loan with as little as 5 per cent deposit, it’s definitely not the most advisable way to enter the home loan market. Banks view people with low deposits as ‘high risk’ and often charge higher interest rates as a precaution. The smaller your deposit, the more you’ll also have to pay in LMI as it works on a sliding scale dependent on your deposit size.
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.
Pre-approval for a home loan is an agreement between you and your lender that, subject to certain conditions, you will be able to borrow a set amount when you find the property you want to buy. This approach is useful if you are in the early stages of surveying the property market and need to know how much money you can spend to help guide your search.
It is also useful when you are heading into an auction and want to be able to bid with confidence. Once you have found the property you want to buy you will need to receive formal approval from your bank.
Buying a home comes with ‘hidden fees’ that should be factored in when considering how much the total cost of your new home will be. These can include stamp duty, title registration costs, building inspection fees, loan establishment fee, lenders mortgage insurance (LMI), legal fees and bank valuation costs.
Some of these fees can be taken out of the mix, such as LMI, if you have a big enough deposit or by asking your lender to waive establishment fees for your loan. Even so, fees can run into the thousands of dollars on top of the purchase price.
Keep this in mind when deciding if you are ready to make the move in to the property market.
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.
‘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.
The quickest way to pay off your home loan is to make regular extra contributions in addition to your monthly repayments to pay down the principal as fast as possible. This in turn reduces the amount of interest paid overall and shortens the length of the loan.
Another option may be to increase the frequency of your payments to fortnightly or weekly, rather than monthly, which may then reduce the amount of interest you are charged, depending on how your lender calculates repayments.
Once a home loan’s contracts are exchanged between the borrower and the lender, a five-day cooling-off period follows, during which the contracts may be cancelled if needed.
When the Reserve Bank of Australia cuts its official cash rate, there is no guarantee lenders will then pass that cut on to lenders by way of lower interest rates.
Sometimes lenders pass on the cut in full, sometimes they partially pass on the cut, sometimes they don’t at all. When they don’t, they often defend the decision by saying they need to balance the needs of their shareholders with the needs of their borrowers.
As the attached graph shows, more recent cuts have seen less lenders passing on the full RBA interest rate cut; the average lender was more likely to pass on about two-thirds of the 25 basis points cut to its borrowers.
Some lenders will allow you to apply for a mortgage if you are a contractor or freelancer. However, many lenders prefer you to be in a permanent, ongoing role, because a more stable income means you’re more likely to keep up with your repayments.
If you’re a contractor, freelancer, or are otherwise self-employed, it may still be possible to apply for a low-doc home loan, as these mortgages require less specific proof of income.
Stamp duty is the tax that must be paid when purchasing a property in Australia.
It is calculated by the state government based on the selling price of the property. These charges may differ for first homebuyers. You can calculate the stamp duty for your property using our stamp duty calculator.
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.
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.
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.
Sally is the Research Director for RateCity and a regular commentator on television and radio about personal finance matters. She is passionate about helping everyday Australians get access to affordable finance options, and helping people save money through smart budgeting and easing everyday expenses. Sally is a contributor to news outlets including Fairfax, News Ltd and Money Magazine, among others.
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The Reserve Bank is expected to keep the cash rate on hold at 0.25 per cent when it meets today, but the rate cuts keep coming from the banks for new home loan customers.
Learn about home loans with our guides
Home Loan Guide
Home loans have five key areas to consider: loan type, interest rate, fees, features and loan size.
Refinancing can help you save money, increase flexibility, consolidate debts and much more.
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Six steps to refinance your home loan?
Refinancing a home loan may help you to save money on your mortgage, enjoy greater flexibility or features, or even consolidate other debts. Learn more about switching home loans before you compare refinancing mortgage options at RateCity.
How much should I borrow? | RateCity
How much should you borrow from the bank when purchasing a property? Working out how much or how little you can afford to borrow is an important first step towards home ownership. It’s important not to borrow more than you can afford to repay, so consider your income and expenses when calculating your mortgage amount.