Loan Rates

How to compare home loan rates

Nathan Gooley
Jun 2, 2021
Yard Financial Pty Ltd | ACN 623 357 513 | Australian Credit Licence 509481

Table of Contents

When looking at home loans, you need to understand how to compare interest rates. This doesn't just mean which one is higher or lower but the different types of interest rates. 

Each financial situation is unique. Some people want to purchase a home to live in and wish for the certainty of knowing what their repayments are, so opt for a fixed interest rate owner-occupier home loan. Others may be building an investment portfolio and prefer to increase cash flow with an interest-only investor loan. And others might like the attractiveness of honeymoon rates and budget for any changes after the honeymoon period is over.

The home loan interest rate will likely be the most significant deciding factor for choosing a home loan, so it's essential to understand each type. But you need to also remember that a home loan is a debt that you'll be paying interest on for up to 30 years, which means your circumstances may change. This means you can change the type of interest rate you have on your home loan at some point, so it's best to understand them all.

Before you just take the lowest interest rate in the market, learn how to compare each type of home loan rate to find the best one for you. 

Variable vs fixed interest rate

When you compare interest rates, you'll need to decide if you want the certainty of a fixed rate or the flexibility of a variable rate.

Variable interest rates may go up or down during the loan term. What this means for you is that you can save money on mortgage repayments if interest rates decrease. But you could also see your repayments increase if interest rates go up. Variable-rate home loans also offer flexibility with the freedom to refinance, make additional repayments or repay your loan in full at any time without incurring fees. You also have access to other features like an offset account and redraw facilities. All of these loan features aren’t available with fixed-rate home loans, or if they are, they come with fees or limitations. 

In contrast, fixed interest rates are locked for a specified period, so you have the certainty of knowing how much your mortgage repayment will be for that period. However, once the fixed period ends, the rate often reverts to the standard variable rate. This is typically a higher interest rate than the advertised variable rate that includes discounts. With a fixed home loan rate, you lose the ability to refinance, make additional repayments or payout your home loan at any time without fees or break costs. You may be able to make some extra repayments, but they will be capped, or you’ll pay additional fees. If you want other features like an offset account or redraw facilities, you typically won’t get these with a fixed rate home loan. 

There is also the option of splitting your home loan, which allows you to benefit from both a fixed and variable interest rate. When you split your home loan, a percentage will be charged the fixed rate, and the rest will be charged the variable rate. This way, you can have some certainty of your repayments. Still, you can access things like an offset account or redraw facilities. You'll also get some benefit if interest rates decrease but not have to worry too much if they increase as it won't impact your whole repayment.

Principal and interest vs interest only 

When you compare home loan rates, you'll find interest rates that are principal and interest or interest only. Understanding the difference between principal and interest or interest-only comes down to what makes up the mortgage repayments. 

When you choose a principal and interest loan, your repayment covers the loan principal or loan amount and interest so that the loan is repaid in full by the end of the term. An interest-only repayment only includes the interest you need to pay and will not reduce the loan principal.

Most home buyers take out a principal and interest home loan to repay the loan amount and any interest charged with each mortgage repayment. The benefits of principal and interest repayments include:

  • Being able to repay your home loan sooner.
  • As you're repaying your principal, you're building equity in your home. 
  • You'll pay less interest over the life of your home loan because you're also paying down the loan amount.

When it comes to interest-only repayments, they are most common amongst investors. They are only offered for a defined period - typically 1 to 5 years but some lenders also have 10-year interest-only loan options. After the interest-only period ends, the loan repayments will revert to principal and interest and increase substantially as you need to start paying back the loan principal. Some of the reasons you may choose interest-only repayments include:

  • Possible tax benefits if the property is being used as an investment and your circumstances allow it.
  • A short term cash flow increase to accommodate a one-off expense, e.g. for renovations or education.
  • Supplement loss of income due to parental leave or change. 

If you're considering interest-only repayments, you'll benefit from speaking to an independent financial adviser or accountant to understand what it means in the long term.

Owner-occupied vs investor interest rates

The decision of getting a mortgage as an owner-occupier or investor will also impact the interest rate you will be charged. 

When comparing home loan rates for owner-occupiers with the home loan rates for investors, owner-occupiers get more competitive interest rates. Lenders may sometimes view investors as riskier borrowers. Further, some investors may have multiple loans or use debt as part of their investment strategy.

Lenders may view owner-occupiers as safer borrowers when offering the best home loan rates. They’re purchasing a home to live in and can often be more cautious with their household debt to ensure they keep their home.

Introductory or honeymoon interest rates

Comparing home loan interest rates, you might find that the best home loan rates are introductory or honeymoon rates. Some lenders offer their lowest home loan rates as introductory or honeymoon interest rates to attract new customers.

You should make sure not to be swayed by the lower interest rates and make sure the other features of the loan suit you. These home loan rates are low, lucrative, and often part of an attractive package but are only applicable or available for a limited time. This means that your interest rates will usually increase after the introductory period is over to another rate the lender offers. It may be the standard variable rate or another stated interest rate. You can check the comparison rate to see how much your interest rate may change when the introductory or honeymoon period is over. The comparison rate will include fees, charges and changes in interest rates once the introductory period is over.

Before shopping for a home loan, understanding the different interest rates and loan types you'll encounter will help you make the right decision. Finding the best home loan interest rates for you involves comparing the rates and rate types available and seeing which one suits your requirements.

If you're looking for the best home loan interest rates in Australia, you'll likely find that online lenders like Yard can offer the most competitive rates. Unlike banks, they don't have the cost of physical branches and pass on these savings to you, the customer. You can check out Yard's range of home loans here.

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