Home loan interest rates: what matters besides the advertised rate?

When comparing home loan interest rates, the lowest advertised rate can attract attention. However, it does not necessarily identify the loan that will cost you the least or suit the way you plan to manage your mortgage.

A meaningful comparison should consider the interest rate, comparison rate, fees, loan term, repayment structure, available features and the lender’s eligibility requirements.

What is a home loan interest rate?

The interest rate determines how much interest the lender charges on your outstanding loan balance.

Variable rates can move over time. Fixed rates generally remain unchanged during the agreed fixed period, although the rate will usually revert to another rate when that period ends.

The Reserve Bank of Australia sets the cash rate target, which influences interest rates throughout the economy. However, lenders make their own pricing decisions based on funding costs, competition, credit risk and commercial considerations. A change in the cash rate does not guarantee that every lender will change its home loan rates by the same amount or at the same time.

Interest rate versus comparison rate

The advertised interest rate usually shows the rate applying to the loan.

The comparison rate attempts to provide a broader indication of cost by combining the interest rate with certain fees and charges. It is calculated using a standard loan amount and term, so it may not reflect your actual loan size, loan term or circumstances.

The comparison rate is useful, but it should not be your only comparison tool.

Features can affect the real value of a loan

A loan with a slightly higher rate may still be competitive if it provides features you will use, such as:

• a 100% offset account
• additional repayments
• redraw
• the ability to split the loan
• flexible repayment frequencies
• portability
• construction lending
• multiple offset accounts.

Conversely, paying an annual package fee for features you do not use can increase the effective cost of the loan.

ASIC’s Moneysmart recommends comparing the rate, comparison rate, fees, repayment type, loan term and features rather than focusing on a single number.

Your rate may depend on your circumstances

The rate available to you may be affected by:

• whether the property will be owner-occupied or used as an investment
• your loan-to-value ratio
• whether repayments are principal and interest or interest only
• your loan size
• the property type and location
• your credit profile
• whether you qualify for a professional, package or promotional offer.

This means a rate advertised online may not be available for every borrower or property.

Compare repayments as well as rates

Before selecting a loan, consider repayments at the proposed rate and at a higher rate.

A lower rate can reduce repayments, but extending the loan back to a longer term can increase the total interest paid over time. It is important to compare the proposed loan against your existing remaining term rather than simply accepting a new 30-year term.

Questions to ask when comparing rates

Ask:

• Is the rate introductory or ongoing?
• When does any discounted period end?
• What rate applies afterwards?
• What annual, monthly, application or discharge fees apply?
• Does the loan include an offset account or redraw?
• Are there restrictions on additional repayments?
• What happens when a fixed period expires?
• Is the lender likely to require lender’s mortgage insurance?

Speak with an experienced mortgage broker

A mortgage broker can help you compare available loan options, understand lender requirements and assess the expected costs and features.

Mortgage brokers must act in a consumer’s best interests when providing credit assistance in relation to home loans. The recommended loan must still be assessed against your individual requirements, objectives and financial circumstances.

Call to action: Talk with an experienced mortgage broker in the finweb network to compare home loan rates, repayments, fees and features based on your circumstances.

*General information only. This article does not constitute personal financial, taxation or legal advice. Interest rates, fees and lending criteria can change. Credit is subject to lender assessment and approval.*