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Why are home loans so cheap at the moment?

Gone are the days of home loan interest rates sitting around 17%. Currently, we are experiencing one of the lowest interest rate environments in Australian home loan history. This is due to several factors, most significantly being the Reserve Bank of Australia’s (RBA) cash rate sitting at its lowest point ever.

As the cash rate is an influencing factor for how lender’s set home loan rates, when the cash rate drops, home loan rates are meant to fall too. The last time Australia experienced a cash rate hike was November 2010, meaning there is a generation of homeowners who have never experienced interest rate increases.

RateCity research has found that over the last five years alone, the average variable owner-occupier home loan rate (paying principal and interest) has fallen by 1.12%.

Average variable owner-occupier rates over time:

Time frameAverage rate
5 years ago4.31%
2 years ago3.91
Today3.19%

Note: Figures based on average variable owner-occupier rates paying principal and interest. Data accurate as of 23.09.21.

This is great news for homeowners right now, but it comes with a warning – what goes down will eventually come up again. Finding a low-rate home loan is a priority for many homeowners as it may help to keep ongoing costs down. But if finding a cheap home loan is your biggest priority, it’s important to remember that there is more to a mortgage than its interest rate.

What makes up a cheap home loan?

Your home loan is arguably your biggest ongoing expense, so it makes sense that you may want to prioritise affordability. Finding a ‘cheap’ home loan isn’t just about choosing the lowest rate option, as your home loan needs to best suit your financial goals and budget.

There are a few loan features you'll want to compare before you make your loan application:

  • Interest rate - One of the biggest factors of a home loan's affordability. The higher the interest rate, the more expensive your loan repayments may be. Keep in mind that the lowest interest rates in the market are typically reserved for customers who meet specific criteria outlined in the next section.
  • Fees – A “low rate” home loan can quickly become expensive if the lender charges higher than average fees. There are a range of potential home loan fees you may be charged that contribute to the overall cost of the mortgage. This includes upfront fees like home loan application fees, ongoing fees like annual fees, and more.
  • Features - If you opt for a home loan with all the bells and whistles, you'll typically find the mortgage is more expensive due to the fees and interest charged. Features could include the ability to make additional repayments, a redraw facility or an offset account. It may also mean choosing a home loan package with bundled credit cards, transaction accounts and a line of credit. While these features may mean higher ongoing mortgage costs, they may end up helping you save thousands of dollars over the life of the loan.
  • Repayment frequency - As home loan interest is compounded daily, how often you make repayments will significantly reduce not only the principal amount, but the interest you are yet to pay. For example, switching from monthly repayments to fortnightly home loan repayments may help to reduce the overall cost of the mortgage.
  • Loan term - The period of time you choose to repay the full cost of the loan also plays a role in its affordability. A typical home loan length is around 25 years. A longer loan term, such as 30-40 years, may mean your monthly repayments are smaller, but the total interest you'll pay over the life of the loan can be tens of thousands of dollars higher.

How do you find a cheap home loan?

There are a multitude of interest rate options and repayment types associated with home loans. From fixed or variable, to interest-only or principal and interest, finding the cheapest home loan may depend on the loan type you choose.

As a rule of thumb, are a few things to keep in mind that may make up the cheapest home loans:

Owner-occupier loans

Owner-occupier home loans typically come with lower interest rates than investor home loans, on average. Lenders claim this is because they believe there's ‘less risk’ of default on the mortgage when the homeowner is living in the home, rather than renting it out. And the lower the risk to the lender, the lower the interest rate.

Fixed home loans

In a low cash rate environment, lenders typically offer cheaper fixed interest rates than variable home loan interest rates. The lender is betting that interest rates could fall further and reduce their variable interest rates at greater numbers. If more borrowers are locked into fixed rates when a bank is forced to cut its variable rate home loans, the banks will still maintain some profits.

Australia has been in a low cash rate environment for several years now. And while no one can predict the bottom of the market, locking in a low fixed rate now could mean you have one of the cheapest home loans, despite how rates may change in the future.

Principal & interest loans

Lenders typically offer cheaper home loans for borrowers paying principal & interest versus interest only repayments. This is because the loan repayments on a principal and interest mortgage are chipping away at the outstanding debt. If you're only paying interest, but your principal (loan amount) is untouched, your debt is also not being reduced.

This, again, all comes back to the amount of risk to the lender. If someone on an interest-only loan suddenly cannot meet their loan repayments and defaults, and they've never paid off any of their principal, the impact on the lender is much more severe.

New home loan customers

Whether you're a first home buyer or looking to refinance, lenders also typically reserve their cheapest rates for new customers. This is also called the 'loyalty tax', as home loan lenders will use cheap rates to entice new customers onto their books, while keeping existing customers on higher rates. Generally, if you want a cheaper rate from your existing lender, you'll either need to call them up and request one or make yourself a new customer and refinance.

Deposit size / loan-to-value ratio (LVR)

Another factor to consider when searching for your cheapest home loan is the loan-to-value ratio (LVR). This is the difference between the amount you borrow from the bank and the value of the property, generally represented as a percentage. For example, if you've saved a 10 per cent deposit for a home loan, your LVR would be 90 per cent when you purchase a property.

Commonly, the lower the LVR, the cheaper the mortgage. This is because lenders view you as a less risky borrower if:

  • you're a would-be buyer and have shown you can save a bigger deposit, or
  • you're a refinancer and have built up some equity in your home.

If you're able to save up a 20 per cent deposit and have an LVR of 80 per cent, you'll also be able to avoid costly Lenders Mortgage Insurance (LMI). This is because if you have a higher LVR, you're seen to carry a greater risk. LMI is an additional insurance cost paid to the lender that helps to protect them at the risk you'll default.

How do I find my bank’s cheapest home loan rate?

As mentioned above, new home loan customers typically get offered lower interest rates. If you’re curious as to what your current lender is offering new customers, here’s how you can check:

  1. Go to our home loan companies page.
  2. Find your current lender.
  3. Click through to their company page.

There you can see the current home loan interest rate offerings for owner-occupier and investors.

Keep in mind that some mortgage brokers have their own relationships with lenders and may be able to offer different interest rates than those advertised.  

How to compare cheap home loans

The best way to compare cheap home loans is to use comparison tools, such as comparison rates, comparison tables and calculators.

Comparison rates 

Comparison rates allow you to get a deeper understanding of the true cost of a loan. If you just look at the advertised interest rate, you’re not taking into consideration other costs. Comparison rates also factor in most fees to give you a better picture of what your repayments may look like, based on a $150,000 loan over 25-years.

Comparison tables 

There are hundreds of home loans in the Australian market. Comparison tables, such as the one on this page, can help you to compare apples with apples. By allowing you to filter down the loan amount, loan type, and any features you may want, you can best compare home loans that suit your specific budget and needs, side by side.

Home loan calculators

Calculators, such as the Mortgage Repayment Calculator or Refinance Calculator, may help give you a better picture of how a mortgage could fit into your budget. Once you've narrowed down your shortlist of home loans, putting their comparison rates into a calculator can show you what the potential loan repayments will look like, and if that fits into your financial situation.

Real Time RatingsTM

Another way to compare cheap home loans is to look at the Real Time RatingsTM score of each loan product. Real Time RatingsTM is RateCity’s world-first rating system that ranks home loans based on your individual requirements. Each product is given a score out of five, based on loan costs and flexibility. Unlike other comparison pages which rank their products once or twice a year, Real Time RatingsTM results are calculated live, so they are up to date as possible.

Is a cheap home loan better?

Keeping costs down is a common priority for many homeowners in Australia, but there are other factors to keep in mind when comparing loan options.

The lowest rate home loan you can find may not be the best fit for your financial goals and budget. And a basic, ‘no-frills’ loan option may not offer the types of benefits and features you’re looking for in a mortgage.

Here are a few key questions to ask yourself when comparing home loans:

  1. Are you an owner-occupier or an investor? Investors are typically charged higher rates than owner-occupiers, so if you plan to rent out the property you purchase, you may be paying a higher rate on average with investment home loans.
  2. Do you want home loan features? Lenders generally charge more on loans with helpful features, such as an offset account, redraw facility or the ability to make extra repayments.
  3. What repayment type do you want? If you’re prioritising home loans that charge interest-only repayments over principal and interest repayments, you may find that the rates are higher on average.
  4. What interest type do you prefer? Depending on the rate environment, you may find lenders are offering lower interest rates for variable home loans or fixed rate home loans. If the interest rate type you prefer is at a higher rate, this may be a cost you have to contend with.

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How do you find cheap home loans?

With so many interest rate options and repayment types available, finding the cheapest home loan may depend on the type of loan you choose.

Whether you’re looking for an owner-occupier or investor loan, with interest-only or principal and interest repayments, on a fixed or variable interest rate, the cheapest home loan rate available may vary greatly.

One way to find the cheapest option for you is to narrow down your search and compare the options that best suit your individual requirements. RateCity’s home loan comparison tables can help you get started on your search and take the hassle out of shopping around.

Is the lowest home loan rate always the cheapest?

The home loan with the lowest interest rate may not always be the cheapest mortgage option for you. Sometimes a home loan with a low interest rate may charge high fees, which may cost more in total than a mortgage with a higher interest rate and no fees.

Consider checking the comparison rate, which combines interest and standard fees, to get a better idea of the overall cost of different home loan options.

Are fixed rates or variable rates cheaper?

Fixed and variable home loan interest rates are discretionary based on the lender’s decision. They will also be influenced by the Australian economy, as well as the Reserve Bank of Australia’s cash rate. The specific interest rate you may be offered will also depend on your credit history and financial situation.

Whether a fixed or variable rate home loan is the cheaper option for you will depend on all the above, and may still fluctuate over a 25-year home loan term. Therefore, it’s worth comparing your loan options with our comparison tables to see how the rates compare, based on your specific financial needs.

How do you compare home loans?

To compare home loans, you can assess the components of the loan against your own financial situation and other mortgages in the market.

Look at the interest rate, rate type (fixed or variable), loan fees, features, loan term, repayment frequency and more to find a home loan that fits with your budget and property goals.

Then, use comparison tools like comparison tables, calculators, or RateCity's Real Time RatingsTM to create a short list of home loan options, and decide which home loan best suits your needs.

Do you compare mortgages using the comparison or advertised rate?

A lot of Australians compare home loans using the advertised interest rate, which indicates how much interest you’ll be charged on your mortgage repayments. The lower your rate, the cheaper your home loan should be.

However, interest charges aren’t the only cost associated with home loans. Most mortgage lenders also charge fees on their home loans. A mortgage with a low interest rate and high fees can sometimes cost more than a mortgage with a high interest rate and low fees.

A home loan’s comparison rate combines the cost of interest with the cost of standard fees and charges into a single percentage rate. Mortgage lenders are required to display a comparison rate alongside their advertised rate to better indicate the home loan’s overall cost.

Keep in mind that to ensure consistency, all comparison rates are calculated assuming a $150,000 principal and interest mortgage with a 25 year term. As your home loan may be different, the comparison rate may not accurately reflect exactly how much your home loan may cost. Also, the comparison rate doesn’t include every home loan fee and charge, so it’s still important to compare home loans and read the fine print before you apply.

This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.