Choosing a home loan
How to compare home loans and get the best
When looking for a good deal on a home loan (mortgage), the
interest rate matters the most. A home loan is a long-term debt, so
even a small difference in interest adds up over time.
Home loans come with different options and features. These can
offer flexibility or let you pay off your loan faster. Some options
could cost you more, so make sure they're worth it.
Principal and interest
will pay off the loan
Principal and interest loans
Most people get this type of home loan. You make regular
repayments on the amount borrowed (the principal), plus you
pay interest on that amount. You pay off the loan over an agreed
period of time (loan term), for example, 25 or 30 years.
For an initial period (for example, five years), your repayments
only cover interest on the amount borrowed. You aren't paying off
the principal you borrowed, so your debt isn't reduced. Repayments
may be lower during the interest-only period, but they will go up
after that. Make sure you can afford them. See interest-only home
Get the shortest loan term you can
Your loan term is how long you have to pay off the loan. It
impacts the size of your mortgage repayments and how much interest
- A shorter loan term (for example, 20 years) means higher
repayments, but you'll pay less in interest.
- A longer loan term (for example, 30 years) means lower
repayments, but you'll pay more in interest.
Aim for the lowest interest
An interest rate even 0.5% lower could save you thousands of
dollars over time.
Weigh up the pros and cons of fixed and variable interest rates
to decide which suits you.
Fixed interest rate
A fixed interest rate stays the same for a set period (for
example, five years). The rate then goes to a variable interest rate, or you can
negotiate another fixed rate.
- Makes budgeting easier as you know what your repayments will
- Fewer loan features could cost you less.
- You won't get the benefit if interest rates go down.
- It may cost more to switch loans later, if you're charged a
Variable interest rate
A variable interest rate can go up or down as the lending market
changes (for example when official cash rates change).
- More loan features may offer you greater flexibility.
- It's usually easier to switch loans later, if you find a better
- It makes budgeting harder as repayments increase if interest
rates go up.
- More loan features could cost you more.
If you're not sure whether a fixed or variable interest rate is
right for you, consider a bit of both. With a partially-fixed rate
(split loan), a portion of your loan has a fixed rate and the rest
has a variable rate. You can decide how to split the loan (for
example, 50/50 or 20/80).
Mortgage features come at
Home loans with more options or features can come at a higher
cost. These could include an offset account, redraw or line of
credit facilities. Most are ways of putting extra money into
your loan to reduce the amount of interest you pay.
Weigh up if features are worth it
For example, suppose you are considering a $500,000 loan with an
offset account. If you're able to keep $20,000 of savings in the
offset, you'll pay interest on $480,000. But if your offset balance
will always be low (for example under $10,000), it may not be worth
paying for this feature.
Avoid paying more for 'nice-to-have' options
When comparing loans, consider your lifestyle and what options
you really need. What features are 'must-haves'? What are
'nice-to-haves'? Is it worth paying extra for features you may
never use? You may be better off choosing a basic loan with limited
Work out what you can afford to
Be realistic about what you can afford. If interest rates rise,
your loan repayments could go up. So give yourself some breathing
Work out your home loan repayments and compare different
With the amount you can afford to borrow, compare loans from at
least two different lenders. Check the loan interest rates, fees
and features to get the best loan for you.
Comparison websites can be useful, but they are businesses and
may make money through promoted links. They may not cover all your
options. See what to keep in mind when using comparison
Compare home loan rates, fees and features
- Interest rate (per year) -
interest rate advertised by the lender
- Comparison rate (per year) - a
single figure of the cost of the loan - includes the interest rate
and most fees
- Monthly repayment - how much you'll have to
pay each month on a loan
- Application fee - one-off payment when
starting a loan, also called establishment, up-front or set-up
- Ongoing fees - fees charged every month or
year for administering a loan, also called service or
- Loan term - length of time a loan starts
- Loan features - such as offset account, redraw or line of
credit, and their fees (for example to redraw money)
Using a mortgage broker
With many lenders to choose from, you may decide to get a
mortgage broker to find loan options for you. See using a broker
for tips on what to ask your lender or broker.
Case study: Marina and Sami get the best deal on a home
Marina and Sami are looking to buy a $600,000 apartment. They've
saved a 20% deposit and want to borrow $480,000 over 25 years.
They check a comparison website to compare:
- interest rates - variable versus fixed
- fees - application fee, ongoing fees
- features - basic versus extra (redraw facility, additional
Ticking different boxes on the website, they look at loan
options to see how the cost varies. They decide they want the
certainty of an interest rate fixed for three years. Plus they want
to be able to make additional repayments. Using these as filters,
they review loan options.
They repeat the process with another comparison website.
Then, using the mortgage calculator, they compare
the impact of different interest rates over 25 years.
Based on their research, they shortlist loans from two lenders.
They approach each lender to get a quote personalised for their
situation, then choose the best loan.
There are many things to consider before you
sign up for a loan. Do your homework before you sign up to make
sure you are getting the best deal.
Last updated: 28 Aug 2019