Australia Mortgage Rates: Everything You Need to Know
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Interest rates on mortgages are continually changing. The general trend is that, on average, rates rise over time. However, in the wake of the pandemic, interest rates for owner-occupied home loans are currently at an all-time low.
Interest is the money you pay on your mortgage. Any sum of money you borrow, whether for your house or a car, is charged interest. For instance, if you borrow $500,000 and the interest rate is 4%, you will pay 4% of the home loan balance on top of repaying the sum borrowed.
The interest rates change over time, and as they fluctuate, they can benefit or disadvantage you. Read this article to learn everything about interest in different kinds of mortgages and how to find the right interest rate for your situation. We’ll take you through the difference between a fixed-rate home loan and a variable loan, comparison rates and home loan FAQs.
What Is a Mortgage?
Let’s start with the basics. A mortgage is a type of loan that you receive from a bank or lender to purchase a property. A mortgage can be used to buy a residential house or apartment or can be used to buy commercial property. There are many different types of mortgages, and home loan terms differ depending on whether you are purchasing an owner-occupier property or investment property.
You can apply for a mortgage from a bank or non-bank lender. Lending policies differ depending on the bank; they might outright decline a mortgage application if it poses a risk to their organisation.
Non-bank lenders, on the other hand, are individual institutions with an Australian credit licence providing home loans. They can sometimes have more specific niche markets and offer specialist services that banks and larger financial institutions cannot.
Different Types of Mortgages
There are different types of mortgages; the way they each interact with interest rates differ. When you compare home loan rates, you need to consider what kind of loan you are dealing with.
- Variable interest rate home loan – you pay fluctuating rates of interest throughout the home loan term.
- Fixed-rate home loan – for a fixed period of time, you pay a fixed interest rate.
- Interest-only home loan – for a fixed period of time, you only pay the interest and not the principal.
Discuss with the lender or bank whether variable or fixed-rate home loans are best suited for your financial situation. The type of home loan you secure depends on your credit score, deposit amount and loan amount.
Get a free Australian mortgage assessment today.
Variable Home Loan Interest Rates
A variable rate home loan, as stated above, is a mortgage type where you pay fluctuating interest rates depending on the market rate. For instance, if the interest rate on your home loan is 4% when you are approved, it will move with the market rate. So, if the national interest rate increases by 0.5%, your interest rate will similarly increase.
However, the benefit is that, when the rates decrease, your monthly repayments will similarly decline. Plus, a variable rate home loan is often more flexible; it is easier for you to refinance, make extra repayments, or pay it off entirely without incurring early repayment fees.
In addition, it often comes with perks, such as fee waivers, an offset account that can help lower your interest repayments and increase cost savings.
On the other hand, there is less certainty about each monthly repayment; therefore, more challenging to budget for. Yet, interest rates do not fluctuate drastically that often as they rely on the market’s trend.
Fixed Home Loan Interest Rates
A fixed-rate loan, on the other hand, is a type of mortgage where you repay interest at a fixed rate for a set number of years. Usually, the period is up to five years. So, if you start with a 4% interest rate, this remains constant and unaffected by the market for the agreed period of time.
This might benefit you if interest rates start to rise; however, it can be a disadvantage if the market rates start to drop. You could end up paying more or less than the current market interest rate.
Some people choose to opt for fixed-rate home loans as it offers peace of mind and allows for more manageable budgeting monthly repayments. Plus, there is minor variation in fixed rates between lenders. However, this often means that the interest rate is higher than those of the average variable rate home loan.
Fixed-rate loans usually offer less flexibility than others. It is harder to refinance or make unlimited additional repayments without being subject to early repayment fees.
What Are Comparison Rates?
When comparing home loans, you will usually see a comparison rate. All lenders with an Australian credit licence are required by law to display comparison rates.
A comparison rate is a total payment for home loans, including interest, fees and charges, so you have a better idea of the actual cost of the home loan. These additional costs might include an annual package fee, ongoing fees, redraw fees and upfront fees.
When comparing different home loans, it can be hard to tell which is cheaper – one might have a lower interest rate but extra ongoing fees. The comparison rate means how much you will pay for each financial product.
However, remember that a home loan comparison rate is calculated by a standard of a secured loan of $150,000 with a loan term of twenty-five years. It doesn’t take into account different values and time frames. Therefore, while it assists when you compare home loans, it doesn’t tell you precisely how much interest you will pay.
While it makes a good guide, don’t rely entirely on comparison rates; consult a lender to know which home loans are really the best value.
How Are Home Loan Rates Determined?
Home loan interest rates are determined by the Reserve Bank of Australia. The RBA sets the official cash rate by meeting on the first Tuesday of every month (except January) to discuss whether it should increase, decrease or stay the same. This decision is based on economic factors such as inflation, employment, spending levels and investment.
Each bank and lender then decides their own interest rates based on the RBA’s official rate. The banks and lenders take their own business costs into account, so, therefore, their interest rates are usually just higher than the rate set by the RBA.
Get a free Australian mortgage assessment today.
How Much Difference Does a Higher or Lower Interest Rate Make?
The amount of interest you pay on a basic home loan can make a substantial difference to your monthly payments. Even a small variation in the interest rate can make a difference of several thousand dollars over the home loan term.
For example, let’s say you have a principal and interest loan of $500,000 with a base interest rate of 3% for a home loan term of twenty-five years. The table below shows how much difference just a 0.25% decrease in interest rate has.
Interest Rate | 3% | 2.57% |
Home Loan Amount | $500,000 | $500,000 |
Monthly Repayments | $2,108.02 | $2,041.21 |
Total Interest Paid | $258,887.26 | $234,834.13 |
The lower interest rate results in the home buyer saving an impressive $24,053.13.
How Are My Home Loan Repayments Calculated?
How much you pay each month depends on the home loan type, loan amount, loan term and interest rate.
Your home loan monthly repayments rely largely on what type of loan you opt for: interest-only home loan or principal and interest repayments. You can use our mortgage calculator to work out roughly how much your monthly payments should be.
Interest Only Home Loans
If you have an interest-only home loan, you only pay back the interest rate, not the original amount borrowed for a fixed period. This usually lasts between one and five years. Interest-only repayments usually follow a variable rate.
Interest-only home loans are a great short term solution if you have a tight budget. However, as you are only paying interest, you make no progress towards actually owning your home. Therefore, if you choose to refinance or buy a new investment property, you will have little equity from your current home.
Interest-only home loans are usually a popular choice for investors as they bank on the property value increasing. They sell the property, pay off the loan and make a profit. As an expat, an interest-only home loan might be a suitable option for you. If you’re renting your property out, you can use the freer cash flow you have at the beginning of your loan to renovate the home.
However, you still have to repay the principal amount with an interest-only home loan. After the fixed period is up, your monthly payments will increase for the rest of your home loan term.
Principal and Interest Home Loans
Home loans with principal and interest repayments mean that you repay both the interest and loan amounts at the same time. At the beginning of your loan term, your monthly repayments will largely go towards the interest. However, as the principal gets smaller over time, the interest decreases too. By the end of the home loan’s lifetime, you will be mostly paying the principal.
While you will be paying more for the home loan each month, you will own the entire property when the loan term is up.
How Do I Find the Best Home Loan Rate?
The simplest way to find a home loan with good rates is to engage the help of a mortgage broker, like Odin Mortgage. This is especially important if you live overseas. As an expat, you are less able to research good interest rates than those in the area. Mortgage brokers have extensive connections with lenders and are able to find you the best home loan to suit your situation.
Home loan interest rates are usually decided based on your borrowing power. To improve your borrowing power, you need a good credit score, a significant deposit and proof of income.
As an expat, your deposit should be 20% of the property value. This is worked out by the Loan to Value ratio (LVR). The loan to value ratio is calculated by dividing the home loan amount by the property value.
Unfortunately, lenders only consider up to 80% of your net foreign income, so it may be harder to get approved for the loan amount you need.
Get a free Australian mortgage assessment today.
Are Interest Rates on Home Loans Negotiable?
Yes – you can negotiate the interest rate on any eligible home loans with the lender. Improving your borrowing capacity by saving up a decent deposit and maintaining a good credit score will stand you in good stead for negotiations.
Firstly, make sure you shop around. Getting a quote from multiple lenders might save you thousands. Plus, remember that the lender that may seem to offer the best interest rate may actually not be the cheapest option if it comes with many ongoing fees and upfront fees.
Secondly, if you know the average market interest rates for expats well, then it will be easier to consult your lender and persuade them to lower their rates. If you need to, threatening to refinance elsewhere might prompt them to concede.
Thirdly, discuss additional extras like an offset account or redraw feature on your home loan. While this does not lower the initial interest rate, it can help you save on interest repayments over time.
Finally, consult a mortgage broker to negotiate the home loan interest rate on your behalf.
How Do Interest Rates on Home Loans Differ for Expats?
Interest rates do not differ for expats. However, you should be aware that your foreign income might disadvantage your home loan application. While lenders accept incomes from most countries, they only consider 80% of the net income to protect them from fluctuating exchange rates. Plus, some lenders apply Australian tax rates to your income (which are some of the highest in the world).
Therefore, you might be offered less favourable interest rates than your income deserves.
Expats are usually eligible for all the additional extras that those residing in Australia are offered, such as the maximum home loan term, redraw facilities and an offset account when they borrow money.
Average Australian Interest Rates
According to the Reserve Bank of Australia, lenders’ interest rates dropped to 2.68% in September 2021 from 3.51% in August 2019 for new home loans. On average, interest rates range between 4-8% for a variable rate home loan.
Ask an Expert
At Odin Mortgage, we’re here to help you with all your home loan queries. We specialise in helping expats and foreign nationals find the right home loan for their financial circumstances. With expert independent advice, we can help you through every step of applying for your home loan
Get a free Australian mortgage assessment today.
Frequently Asked Questions
What Is the 'Principal' and What Is 'Interest'?
The principal is the amount of money you borrow to pay for the property. The interest is the additional amount of money you pay the lender for borrowing the principal. A home loan interest rate varies from lender to lender but is based on the cash rate decided by the Reserve Bank of Australia and can fluctuate from month to month.
What Is the Definition of Residential Investment?
Residential investment is the purchase of property to make money. A residential investor is different from an owner-occupier. You will apply for investment loans rather than an owner-occupied home loan and run the property as rental accommodation. You need to pay capital gains tax to the Australian Tax Office on all money made in Australia.
Owner-occupier loans and investment loans often have different application criteria. Plus, if you don’t make money on your rental property, you can claim the interest back on your tax return with negative gearing.
How Much Can I Save With a Low-Interest Rate?
You can save potentially thousands on your home loan interest with a lower rate. A difference of even as little as 0.25% can save you up to around $24,000 on a twenty-five-year home loan of $500,000. Make sure you conduct a sufficient interest rate comparison and consider upfront fees and ongoing fees before making a decision.
How Often Do Home Loan Rates Change?
The RBA meets monthly to decide the cash rates. Some months, it might increase, other months it might decrease, and sometimes it can stay the same. The only month they don’t meet is in January. Because of Australia’s relative economic stability, home loan interest rates don’t fluctuate drastically from month to month. In fact, sometimes a long stretch can go by with little or no change.
If you have a fixed-rate loan, however, your home loan interest rate won’t differ from month to month during the fixed-rate period.
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