One of the critical factors when deciding which home loan you should get is the home loan interest rate. But what exactly are home loan rates, and even more important, how do you decide which is the best home loan rate for you? This guide will help you better understand what home loan rates are and determine which may suit your needs.
There are multiple home loan rate types available on Australian mortgages. They each have their pros and cons, depending on what you're looking for in a home loan rate.
A variable interest rate will be advertised at a set percentage rate per annum but may change depending on the market. Your lender is required to give you reasonable notice of any changes to your home loan rate.
As the name suggests, a fixed interest rate means just that your home loan rate is fixed for a period at least. The fixed home loan rate is generally only fixed for a period of one to five years, with your home loan rate reverting to a variable rate at the end of the fixed period.
A split home loan is a great way to get the best of both worlds. It allows you to have a portion of your home loan under a fixed home loan rate and the rest under a variable home loan rate. To help give you some peace of mind, you could fix 70% of your loan amount. You can then benefit from the possible savings and additional features with a variable home loan rate on the remaining 30%.
Something else that may impact your home loan rate is the repayment type you choose for your home loan.
Principal and interest repayment home loans are the most common type of home loan in Australia. Your repayments include a portion of the principal, the total amount you borrowed from the lender, and the interest charged on this loan amount.
Interest-only repayments are when your mortgage repayments only include the interest charged on your home loan. Interest-only home loans are most popular amongst property investors.
There may be other factors that impact your home loan rates or the amount of your home loan repayments. These include the type of borrower you are, the amount you borrow and the loan term.
The type of borrower you are will likely impact the home loan interest rates a lender offers you. A lender typically charges a higher home loan interest rate for investor loans.
The loan-to-value ratio (LVR) is the percentage of the property's value that you're borrowing from the lender. Some lenders will offer a more competitive home loan interest rate on loans with a lower LVR. As the LVR increases, the home loan rate may increase.
The loan term is the length of time you agree to repay the loan amount to your lender. It won't impact your home loan rate, but it is used in calculating the interest you pay each month. This means it will affect your monthly repayments and the total amount of interest you pay on your home loan.
The longer the loan term, the lower your monthly repayments, but the more interest you'll pay over the life of your loan. A shorter loan term will increase your monthly home loan repayments but means you’ll save on the interest you'll be paying in the long term. You can use our mortgage repayment calculator to estimate how your repayments change based on different loan terms.
Lenders will typically calculate home loan interest daily and charge it monthly. At the end of each day, a lender will divide the remaining loan amount by 365 (some lenders will change this to 366 in leap years) and multiply that amount by your home loan rate. Then each month, when your repayment is due, they'll add all of the interest calculations together to calculate how much interest you owe for that month.
When looking at home loan rates, you'll likely see that there are two interest rates for each home loan. The first is the home loan interest rate, and the second is the comparison rate.
The home loan interest rate is the annual rate of interest you'll be charged on the loan amount. The comparison rate incorporates the home loan interest rate and any upfront or ongoing fees or charges.
Lenders will typically put in the fine print that the comparison rate is calculated based on a loan amount of $150,000 over a 25-year term or similar. Therefore the actual comparison rate you pay on your home loan will differ from the one advertised depending on the size of your loan and your loan term.
Most home loans will come with a range of fees; even the lowest fee loan will likely still have some fees. These fees can include:
The information available about home loans may get overwhelming. It may make the idea of using a mortgage broker extremely attractive as they do all the leg work of comparing different loans. But mortgage brokers work with a select panel of lenders and may miss out on some of the best home loan rates. With the growth of the home loan market in Australia, you'll find that you can often find the best home loan rates online just by doing a little research.
Online lenders like Yard don't have the overhead of physical branches, which means they can often offer some of the best home loan rates in the market. You can check out Yard's range of home loans here.