Pick a rate that's in your best
Interest rates get a lot of attention and for good reason: they
determine the cost of your home loan and what you pay back each
month. Even a small difference in interest rates can make a big
difference to your repayments.
Types of interest rates
The Reserve Bank of Australia sets the 'cash' interest rate, which is reviewed
every month. Credit providers set their own rates and can choose to
increase or decrease the rates in line with the cash rate.
There are different types of interest rates
available, each with their own advantages and disadvantages.
Your interest rate goes up and down in response to changes in
the cash rate and other changes by your credit provider.
The advantage of variable rates is that they usually (but not
always) go down if the cash rate decreases, which reduces the
amount of interest you pay. There are usually no restrictions on
making additional repayments if your home loan has a variable
The opposite also applies: variable rates usually go up if the
cash rate is increased, which means you will pay more interest. The
rate may also increase even if the cash rate does not.
A fixed rate allows you to lock in an interest rate on your
loan, typically for 1 to 5 years. This safeguards you against
future interest rate rises. It also helps you plan your finances
because you know exactly how much you will be repaying.
The disadvantage is you won't benefit from falling interest
rates. There may also be restrictions on making additional
In addition, you may have to pay a large fee for ending the
fixed rate period on your loan early, particularly if interest
rates have fallen since you fixed your rate. See fees for details.
A partially-fixed rate loan (also known as a split loan) lets
you pay a fixed rate on a portion of your loan and a variable rate
on the rest. For example, you may have a $300,000 loan where you
pay a fixed rate on $200,000 and a variable rate on $100,000.
You might consider a split loan if you want the security of
regular payments on part of your loan, but also want to take
advantage of interest rate drops on the other part of your loan.
There are usually no restrictions on making additional repayments
on the variable part of your loan.
However, fixing part of your loan gives you less flexibility
than a fully variable rate loan. If interest rates fall, you will
only get the benefit of lower interest on the variable portion of
your loan. You may also have to pay a significant break fee if you
want to pay out or refinance the fixed rate portion of your
The lowest interest rate may not necessarily be the best value,
as fees and charges can add thousands to the cost of a loan. To get
a good deal, look at the comparison
Some credit providers offer low interest rates for the first 1
or 2 years of your loan. These low rates are sometimes called
Before taking up this option, find out what the interest rate
will be when the 'honeymoon' period ends. Otherwise you could be in
for a nasty surprise.
How your loan to value ratio affects your interest rate
Your loan to
value ratio (LVR) could affect the interest rate on your
mortgage. Your LVR is calculated by dividing the amount of your
home loan by the purchase price (or appraised value) of the
In general, the higher your LVR, the greater the risk to the
lender. Some lenders apply a higher interest rate to loans with an
LVR above 80%, so it is important to calculate your LVR and work
out what effect it could have on your repayments.
You will also need to pay lender's mortgage insurance if your LVR
is higher than 80%.
Case study: Tony and Svetlana split their home loan
After 2 years of searching, Tony and
Svetlana found their perfect first home. They had read in the
papers that interest rates were likely to go up in the next few
months, so they decided to split their home loan. On their $500,000
loan, Tony and Svetlana decided to pay a fixed rate of 7% on
$350,000 and a variable rate of 7.4% on the remaining $150,000.
Two months after they settled into their new home, interest
rates increased by 0.25%, and continued to go up by 0.25% for the
next 3 months. This increased their variable interest payments by
almost $100 per month. By fixing a portion of their loan
they saved over $220 per month.
But had interest rates decreased by 1%, they would be missing
out on savings of over $160 a month. Tony and Svetlana were willing
to take that risk in exchange for some certainty about their
Comparison rates can help you work the true cost of a loan by
reducing the interest rate and most fees and charges to a single
percentage figure. However, cost is not the only thing to consider
when you are trying to work out which loan is right for you. See
our webpage on comparison rates to find out
How to compare interest rates
You can look on comparison websites to
compare interest rates and other features.
Banks, building societies, credit unions and other credit
providers usually have information about their home loans on their
websites. You may also like to speak directly to these institutions
because they often offer discounts on their advertised loans.
If you already have a loan, talk to your credit provider and see
if they will make an attractive offer to keep your business.
Work out the effects of different loan choices.
Limits on interest rates and fees
By law you must not be charged more than 48% annually on your
home loan (this includes any establishment or other fixed
Fees and charges can add up to thousands of dollars over the
life of your home loan, so make sure you know exactly what you're
in for - see fees to
find out more.
Getting the best deal on interest rates can save
you thousands of dollars. Don't forget to factor in fees and
charges when you compare rates to get a clear picture of the best
Last updated: 22 Nov 2018