HOME LOANS
Best interest-only home loan rates comparison
By Sean Callery
Don't be afraid to haggle on rates
Mansour Soltani, Money's Home Loans Expert
“If you’re refinancing or purchasing a new home and your LVR is less than 70% (in other words you have a deposit or equity of at least 30%), you should be able to get better than the advertised price, especially if your loan amount is under $1 million. Usually, the lender will shave 10-15 basis points off the advertised rate and if they don't, ask why."
Mansour Soltani, Money's Home Loans Expert
Home loan interest rate analysis – October 2024
The Money team carried out an in-depth analysis of the 100 cheapest home loans on our database in October 2024. This is what we found:
- The cheapest interest rates are most commonly offered by customer-major banks, with almost half (49%) of the top rates coming from that sector. Non-major banks banks were next on 30%, followed by online lenders at 8%.
- Bank Australia had the highest number of low rate home loan options (19), followed by member-owned Newcastle Permanent (14), Regional Australia Bank (11), then HSBC and Macquarie Bank (8 each).
- None of the big four banks had a product featuring on the list of the 100 lowest rates.
- Fixed rate loans dominate the lowest rates currently, with not a single variable rate in the top 100. Three- and two-year fixed loans most commonly have the cheapest rates, our analysis showed.
- For low-deposit borrowers, only 27% of the lowest rate loans are available with a deposit of less than 20%, and only 17% are available with a 5% deposit.
Updated 1 October 2024
How much could you save with a lower rate on your home loan?
An average home loan borrower could end up paying back twice as much as what they borrowed once interest is factored in. A lower rate could save you tens of thousands of dollars over time.
| Loan amount | Monthly repayment (6.27% p.a.) | Monthly repayment (5.75% p.a.) | Total saving (over 30-year loan) |
|---|---|---|---|
$500,000 | $3,085 | $2,918 (-$167) | $60,202 |
$600,000 | $3,702 | $3,501 (-$201) | $72,243 |
$700,000 | $4,319 | $4,085 (-$234) | $84,283 |
$800,000 | $4,936 | $4,669 (-$267) | $96,323 |
Factors that impact your home loan rate
Your home loan interest rate could depend on:
Your loan-to-value ratio (LVR)
This is your loan amount as a percentage of your property's value. The lower your LVR, the lower your rate is likely to be. If your LVR exceeds 80% (you have less than a 20% home loan deposit), you may need to pay for lender’s mortgage insurance (LMI).
If you’re on a fixed or variable rate
Your interest rate will vary depending on whether you choose a fixed or variable rate. Based on Money's analysis of various lenders, fixed-rate home loans are currently slightly more competitive than most variable-rate home loans, but most customers are opting for a variable rate currently.
The type of loan
Your interest rate will also be dictated by whether you're taking out an investment property loan or a loan to buy a home to live in. Investors typically pay higher rates. If you choose a loan an interest-only home loan, you can also expect to pay a higher rate.
The lender you choose
Each lender sets its own home loan interest rates based on how competitive it wants to be in the market and the kind of borrowers it wants to attract.
Your loan amount
You may pay a higher interest rate if your home loan is below a certain value (e.g. below $300,000) or on a very large mortgage (e.g. above $2,000,000). Lenders make less money from smaller loans, but with the same costs. Larger loans can be seen as riskier for lenders and may attract higher rates as a result.
Your property’s location
If your property is in a high-demand urban area with good amenities, more lenders are likely to be willing to lend to you, meaning you'll likely have access to more options and better rates. Rural property owners may be limited to lenders with a higher risk tolerance, who generally charge higher rates.
Your risk profile
A borrower with a good credit score in a full-time permanent job will typically qualify with lenders offering the lowest home loan interest rates. A borrower with a low credit score or who is self-employed may be limited to specialist lenders who tend to charge higher rates.
Economic factors
A range of economic indicators like the rate of inflation, unemployment figures, and the level of economic growth can all the influence home loan interest rates charged by banks and other lenders.
When will home loan interest rates change?
Peter Drennan, Money's Research & Data Expert
"The RBA wants inflation back between 2-3%, and we're on the way. While that is the case, there is little need to raise rates. But, with inflation still at 3.8%, rate reductions are not likely to happen in the short term either, unless the economy needs a boost. Economists expect the cash rate to fall towards the end of 2024 and into 2025, which would naturally lead to lower mortgage rates. Lower inflation will also reduce living expenses, improving borrowing capacity, so conditions for home loans are likely to improve in the medium term."
Peter Drennan, Money's Research & Data Expert
The next Reserve Bank of Australia (RBA) cash rate decision will be announced after its board Board meeting on 24 September. The cash rate has remained unchanged since November 2023 — homeowners eager for some relief are anxiously awaiting any signs of interest rate cuts.
How to structure your home loan to save on interest
In addition to shopping for the lowest interest rate, here are some simple tips from Money’s home loans expert and mortgage broker, Mansour Soltani, to help you shave time and money off your mortgage.
1
Switch to fortnightly repayments
By making fortnightly repayments instead of monthly, you'll make the equivalent of an extra month's repayment each year without even realising it. There are 26 fortnights a year, the equivalent of 13 monthly repayments. This helps reduce your loan balance sooner and your total interest paid over the life of the loan.
2
Increase your repayments by 5-10%
If your budget allows, consider making extra home loan repayments (however small). For instance, increasing your fortnightly repayments on a $600,000 loan at 6.00% interest over 30 years by just 5% (adding $115 each fortnight) could save you $100,310 in interest overall and shave three years off your home loan.
3
Use your offset account
Keep your household income and savings in your offset account to reduce your interest payable. For a $600,000 home loan with a 6.00% interest rate and fortnightly repayments, having $20,000 in your offset account could shave two years off the loan's life and save $91,742 in interest.
4
Refinance every 2-3 years
Consider refinancing to a lower interest rate every 2-3 years if the market allows, while also reducing your loan term by one year each time. For instance, refinancing a $600,000 home loan from a 6.00% rate on a 25-year term to a slightly lower rate of 5.80% on a 24-year term would slightly reduce your monthly repayments and save you $47,017 in interest over the life of the loan.
Bonus tip...
Mansour Soltani, Money's Home Loans Expert
“To get the best home loan interest rate, your LVR should be 60% or less. Every borrower should aim to lower their LVR to 60% as soon as possible. You can do this by paying down your mortgage when you can or by building the equity in your home by increasing its value.”
Mansour Soltani, Money's Home Loans Expert
Types of home loan interest rate explained
Variable rate
The interest rate can fluctuate throughout the life of the loan. You can benefit from lower repayments when interest rates drop and you usually have more flexibility to make extra repayments on your loan to pay it off faster. The downside of a variable rate home loan is the unpredictability — if rates go up, so will your repayments. The majority of owner-occupier loans in Australia have a variable interest rate, according to the RBA.
Fixed rate
The interest rate on the loan is fixed for a period of time — typically between one and five years. This gives you certainty over your repayments during the fixed rate period and protection from sudden rate increases. The main downside of a fixed rate home loan is that you may not be able to make extra repayments or have access to extra features like redraw.
Split rate
A portion of your home loan is fixed and the remainder is on a variable interest rate. This can give you the best of both worlds, the certainty of fixed rate repayments and the flexibility of a variable loan. You can choose the portions of your split, whether it's 50/50, 60/40, or 70/30.
Intro rate
Some home loans come with a limited-time lower interest rate as an incentive to customers. Once the intro rate expires, your loan will typically revert to a higher ongoing rate for the remainder of the loan term.
Comparison rate
The comparison rate on a home loan is designed to reflect the cost of the loan per year, including interest and most fees. It can be a helpful tool for comparing loans, but the comparison rate has its limitations. For example, it is always calculated on a loan size of $150,000 over a 25-year loan term, which won't be realistic for a lot of borrowers. On a fixed-rate loan, the comparison factors in the rate the loan reverts to once the fixed term ends.
How to compare home loan rates
Compare the interest rate & comparison rate
The headline interest rate advertised by a lender is a useful starting point but it's worth looking at the comparison rate too as this also factors in most of the loan fees. Bear in mind that the comparison rate on fixed rate loan factors in the the variable rate that applies by default when the fixed term ends.
Check the eligibility criteria
The best home loan rates will only be available on specific loan types and for certain borrowers. For example, a lender's lowest rates are generally available on owner occupier loans, for borrowers with a low loan size relative to the value of their property (loan-to-value ratio).
Consider who's offering the rate
All other things being equal, picking the lowest rate home loan is a perfectly sensible thing to do. But it's worth also thinking about factors like the lender's reputation, the level of service you're likely to get, the features available and how convenient managing your loan will be. Some people may be willing to be a bit more for a better overall home loan experience.
Use a broker if you need help
The majority of new residential home loans in Australia are facilitated by mortgage brokers. A good broker takes the guesswork out of doing a home loan comparison and may even be able to get you a more competitive rate. Make sure your mortgage broker gives you 3-5 lender options, and ask them to explain why they chose these lenders specifically.
Don't forget about home loan features
A home loan with a low interest rate will be all the more effective at saving you money if you can combine it with useful features.
Offset account
A 100% offset account is a transaction account linked to your home loan that reduces your interest payable. Every dollar in that account offsets what you owe on your mortgage and your interest. Think of it like a high interest savings account, only instead of earning interest, you're avoiding it.
Extra repayments
Many home loans offer the option to make additional repayments on top of your minimum mortgage repayments. This allows you to pay down your principal loan faster and save on interest. Fixed-rate loans often have limits on additional repayments of up to $10,000 or $20,000 per year.
Redraw facility
Allows you to withdraw any extra repayments you've made on your home loan. You can use your redraw facility for any reason, including emergencies, investments, or other expenses. You can find more in our guide comparing a redraw and offset account.
Repayment holiday
This allows you to temporarily pause or reduce your regular loan repayments, but it could increase your future repayments as accrued interest will be added (capitalised) to your home loan balance. This feature can be handy during parental leave or if you anticipate a temporary reduction in income.
Portability
This option allows you to transfer your home loan to another property without incurring fees. This saves you the hassle of refinancing if you move home and allows you to keep your fixed rate without break costs.
Cashback offers
Some lenders offer cashback deals to attract new customers and incentivise borrowers to refinance their home loans. Some lenders also offer cashbacks to first-home buyers.
