Are you paying too much for your home loan? As interest rates rise, it’s easy for Australian borrowers to get stuck paying a higher interest rate on a long loan term. This can land you with expensive home loan repayments, feeling in over your head and unable to move forward. There are also ways to make sure you nab the best home loan rate available to you.
Whether you’re a new customer or an existing homeowner, there are many options to shift to a lower interest rate. New customers options include:
- Making a larger upfront down payment on the property.
- Improving your credit score.
- Comparing home fixed-rate loans with variable interest rates and different loan terms to find a better rate.
For those with home loans looking to get a better interest rate, options include:
- Refinancing.
- Speaking to your lender.
Getting a better rate on a new loan
To get a low rate as a new customer in Australia, it’s useful to look at the things that increase your mortgage interest rate. By avoiding common traps and putting yourself in the best possible situation, you can equip yourself to shop around for a home loan that suits you.
Common factors to look at which can impact the home loan rate include:
- LVR — Your LVR, or loan-to-value ratio, represents how much equity you have in your property. When you make your upfront payment, if it is the recommended 20% deposit, your LVR is 80% - 80% of the property value is your home loan, and 20% is the amount you have paid.
A high LVR represents a higher level of risk for your lender and a larger amount of mortgage repayments for you. To offset this, lenders will often charge a higher interest rate for higher LVR-tier home loans. The higher percentage you pay as a deposit, the lower your LVR will be, and the more likely you are to secure a lower interest rate.
- Credit score — In another attempt to manage risk, lenders will often offer higher interest rates to borrowers with lower-tiered credit scores. This is called risk-based pricing.
Often what this means is that borrowers with low credit scores may score home loan rates closer to the advertised rate (and comparison rate, which factors in ongoing fees), while higher-risk borrowers may find they are offered higher interest rates. To seek out a lower mortgage interest rate, working on your credit score may be in your best interest. Look to paying off any other outstanding debts, like credit cards and personal loans, and optimising your financial situation for a better rate.
- Loan features — Think about the features you really need in your home loan. While an offset account might sound excellent, is this something you’re going to get use out of? How frequently will you need a redraw facility? Will you use the flexibility to make fortnightly repayments, or are monthly repayments enough for you? A loan with more features may also have a higher interest rate than a simple, no-frills home loan.
- Loan term — Mortgage terms in Australia tend to range between 20 and 40 years. Making monthly payments for 20 years will look very different to 40 years, and the interest rate may look different to accommodate for this. Explore home loans with different terms to see the difference it makes not only to the mortgage payments over the life of the loan but also to the interest rate on offer.
- Type of loan — The type of home loan you choose can also make a big difference to the interest rate on offer. There are some things you will not be able to change: whether you’re looking for an owner-occupier loan or a loan for an investment property, for example. However, there are other things you may want to look at.
You may want to review your decision between a variable interest rate and a fixed-rate home loan. A fixed-rate option will keep you with the same interest rate for the first few years of your home loan, while a variable rate (or adjustable-rate mortgage) is prone to change with interest rate changes.
There may also be a difference between interest-only loans and principal and interest loans. To explore all of the options, you may want to speak to a mortgage broker to discuss the available avenues.
- Loan amount — The loan amount might not make the largest amount of difference to the interest rate on offer, but in some cases, it can be significant. This is particularly notable when you are requesting an especially large loan, which can become riskier for lenders and come with a higher interest rate.
What's the average mortgage rate in Australia?
Getting a better rate on your current loan
One of the less fun parts of homeownership is handling the finance. If you are coming off of a fixed-rate loan, or have a feeling you might be paying too much for your home loan, there are ways to get a better rate.
These include:
- Speaking to your lender — While contacting your provider can be daunting, it is one of the most effective ways to score a better rate.
You may get offered a lower interest rate because new, better offers are currently available or simply because your lender will want to prevent the urge to refinance by rewarding loyalty.
If you have gained equity in your property or moved to a new LVR tier by way of mortgage repayments or extra contributions, you may also find yourself entitled to a very different scope of home loans. You may also be able to move on from costs like lender’s mortgage insurance (required with a deposit under 20% of the property value). This is because you now have a lower loan-to-value ratio and represent less risk to your lender. - Refinancing — You aren’t restricted to your current lender! Whether you’ve moved to a new LVR tier, want to jump on a cashback offer, or have found a lower interest rate, you do have the option to refinance.
As a disclaimer, there can be considerable costs involved. Your current loan will most likely have break costs to think about, not to mention the establishment costs of any new home loan.
Don’t get lured in by an exciting new headline rate without checking the comparison rate (for a more realistic view of the rate you will pay), and if pricing is risk-based, see how this applies to you.
Is it worth it to look for a lower interest rate?
A few percentage points may not seem like a significant difference, but they can really add up in the interest you pay over the life of the loan (and in each of your regular repayments).
For example: On a loan of $800,000 with an interest rate of 5.50% over a 30-year term (imagining your interest rate stays the same and you do not make any additional repayments), you will end up paying $35,232 in interest.
If you can find an interest rate even 0.10% lower on the same loan amount and term, there’s a dramatic difference — your total interest payable would be $17,209. That’s $18,023 savings for a 0.10% better rate.
So if you feel like calling the bank is too much work or that shopping around might not be worth the effort, you’d be wise to do your research!
