Mortgage Rates
Find out everything you need to know about your mortgage’s interest rate right here with Savvy.
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Many factors determine how much it’ll cost you to own your home, but one of the main ones is the interest you pay on your mortgage. Naturally, borrowers want to pay as little interest as possible, so it’s important to find out how to access the lowest rates.
Read about the best mortgage rates and which factors affect what you may be offered right here with Savvy. We’re partnered with a variety of mortgage lenders, so we’ll help you understand how to get the very best interest rate on a loan that’s just right for you by comparing a range of offers.
What type of mortgage interest rates are available to me?
There are three basic types of home loan rate: variable interest rates, fixed interest rates and split home loans.
Repayments on a loan with a variable interest rate will change over time. This type of loan is based on the cash interest rate set by the Reserve Bank of Australia, as well as individual lenders’ decisions to increase or lower their interest rates according to market competition. They offer borrowers the most flexibility, as it’s usually possible to pay off a variable loan more quickly, make additional repayments, withdraw funds or link an offset account to a variable loan.
A fixed rate, as the name suggests, is an interest rate fixed for a set period of usually one to five years. They provide certainty for borrowers who may be on a tight budget, locking their rate in and ensuring their repayments stay the same for a sustained period. Their disadvantage is a lack of flexibility – there are often early exit fees or financial penalties if a borrower wants to pay off a fixed rate loan early, and additional repayments or redraws frequently aren’t possible with this type of loan.
A split loan, where a portion of the loan principal is on a variable rate, and another portion is fixed, offers borrowers the best of both worlds. You can choose what percentage of your loan is fixed and what remains on a variable rate. By using this feature, it’s possible to make extra repayments on the variable part of your loan, saving you money on interest, as well as enjoying the security of a lower fixed rate. You may find in some cases that splitting your loan will result in paying more account-keeping fees, but not all lenders charge these
What factors can affect my mortgage rate?
The mortgage interest rate a lender is prepared to offer you will be influenced by several factors, all revolving around the concept of risk. In simple terms, the more risk you pose as a borrower, the higher interest will be charged. Factors which will affect your interest rate include:
- The type of borrower you are – first home buyer, refinancer or investor
- The type of loan interest you’re after – either a fixed, variable or split interest rate
- The term of the loan – how many years you’ll take to pay it back (up to 30 years). In general, the shorter the term, the lower the interest rate
- What deposit you’re able to offer – the greater the deposit offered, the lower your rate may be. Many lenders will require 20% of the purchase price, but some can accept as low as 5%.
- Your location – whether you’re buying in the middle of a large city or a more remote country location
- The type of home you’re wanting to buy – whether it’s a unit, an apartment in a tower block, or a detached home
How does a loan’s mortgage rate affect the total interest paid?
Even the smallest of changes to the best mortgage rates can have a significant impact on the interest you pay overall. For instance, a 0.5% p.a. interest rate difference will result in a very different outcome over the life of a home loan.
You can see an example of this in the table below, which looks at loans of $500,000 to be repaid over 30 years. As you can see, for each 0.5% increase in the interest rate, the cost of the loan jumps by tens of thousands of dollars.
| Interest rate | Fortnightly repayments | Total interest paid |
|---|---|---|
|
2% |
$853 |
$165,007 |
|
2.5% |
$912 |
$210,749 |
|
3% |
$973 |
$258,344 |
|
3.5% |
$1,036 |
$307,800 |
It naturally makes sense to look for the lowest possible interest rate and to shop around for the best mortgage deal. However, what the best mortgage deal is will vary from person to person depending on personal circumstances and isn’t always solely down to interest rate.
For example, young first home buyers may look for a loan with a lower introductory interest rate and a lower deposit requirement to assist them in the first months of home ownership, when they have plenty of other expenses like buying new furniture. However, an older couple looking to buy an investment property may be looking for tax offset advantages, so it may be their preferred option despite the increased rate.
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What other features should I consider when comparing mortgages?
Fees and charges
The loan with the lowest mortgage rate isn’t always the one with the lowest fees, so it can be tricky trying to weigh up which is better. Using the loan’s comparison rate will give you a more accurate assessment of its true cost, since it combines the interest and all other fees.
Savvy can help you compare lenders’ charges so you get the best mortgage deal possible.
Offset accounts
Offset accounts can save you thousands of dollars over the life of your loan, but they’re not always available on home loans with the cheapest mortgage rate.
You might find it’s worthwhile paying a slightly higher mortgage interest rate if the loan gives you access to an offset account where you can deposit savings to offset some of your principal and therefore reduce overall interest paid.
Additional repayment flexibility
Making extra loan repayments is a great way to cut mortgage costs and pay off your loan faster. However, not all mortgages offer this feature, so you should always check to confirm whether your preferred option does.
You may consider taking on a loan with a slightly higher interest rate if it gives you the flexibility to make extra repayments, which can save you in the long-term.
Redraw options
When you’re budgeting for a home loan, it’s important to think about what you’d do if a sudden large expense pops up. If you’d prefer the flexibility to redraw money from your home loan to help cover you in emergencies, having a redraw option on your loan may mean you’re prepared to pay a little extra interest in return for this handy safety feature.
Early exit fees
Life can sometimes change suddenly in unexpected ways. If you have a fixed-term loan and your life circumstances change, be aware you may be charged hefty early exit fees if you wish to pay a fixed-term loan off earlier or refinance before its expiry date.
If you’re looking for flexibility in the future, it may be a less expensive option to choose a variable rate loan.
