Getting a lower interest rate home loan could save you tens of thousands over the life of your mortgage.
Finding a home loan with a lower interest rate is often the top priority for home buyers. If you're looking for loans with competitive rates you can compare them right now in the table below. Or you can read on to learn the ins and outs of low rate loans.
Compare low rate loans right now
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Everything you need to know about low rate mortgages
Low interest rate home loans often prioritise a rock bottom rate over features. These loans are often simple, straightforward products with a focus on delivering the cheapest mortgage possible. They are sometimes offered by banks without an extensive branch network, or non-bank lenders without branches, who can pass on their savings to borrowers.
If you’re considering a low interest rate home loan, there are a few factors to take into account.
Should you choose a low interest rate home loan?
Low interest home loans can save you a significant amount of money over the term of your mortgage. But the decision of whether or not to choose a low interest rate home loan comes down to your personal goals.
It’s important to remember that low rate loans can often offer these rates because they eschew some of the features and flexibility common to other loans. This isn’t necessarily a bad thing, however. If all you’re looking for is a low monthly repayment, a basic low interest rate home loan could be the perfect fit.
A home loan might also have a low rate because it’s offered by a lender without an extensive branch network. This means you’ll rely on phone or internet banking to manage your home loan. If you’re happy to interact with your lender this way rather than face-to-face in a branch, a low rate home loan could be a good option.
How much difference does a low interest rate make?
When you’re comparing low interest rate home loans, the rates on offer may appear fairly similar. But it’s important to remember that what appears to be a small difference in rate could make a massive difference over the life of your mortgage.
For example, a home loan with a rate of 3.99% might not look that different than a home loan with a rate of 3.89%. But over the course of 30 years, the difference becomes clear.
Let’s assume you took out a $750,000 home loan with the aforementioned 3.99% rate. Your monthly repayments would be $3,576.29, and the total cost of the loan over 30 years would be $1,287,465.20.
Now, a rate just 10 basis points lower would see your monthly repayments reduced to $3,533.22. That might not seem like much, but over the life of the loan, you’d pay a total of $1,271,957.81. That’s a savings of $15,507.39.
If just 0.10% can make such a significant difference, you can imagine the savings you could see from a low rate home loan compared to a more expensive, complex home loan product.
Comparing low interest rate home loans
Low variable rates versus low fixed rates
One of the major decisions you’ll have to make is whether to fix your interest rate or choose a variable rate home loan.
The benefit of choosing a low fixed rate is that it will provide you certainty in your repayments. Fixed rate home loans won’t change for the duration of the fixed rate term you choose, which is generally from 1 to 5 years. This means you’ll know what your repayment is every month.
The downside of choosing a fixed rate is that you won’t benefit from any rate cuts. Fixed rate home loans also often lack the flexibility of variable rate home loans. They often either don’t allow extra repayments, or only allow a set amount of extra repayments. And, if you choose to break the fixed rate term by refinancing, you could face thousands of dollars in fixed rate break costs.
Low variable rate home loans, by contrast, give you the option to refinance without penalty. They also generally offer unlimited additional repayments without penalty, allowing you to get ahead on your mortgage. Variable rate home loans also often come with some of the helpful features we’ll explore below.
The downside, however, is that a variable interest rate means your rate could change at any time. This is great when rates are heading down, but if rates rise you’ll find your repayments getting more expensive.
It’s important to weigh up your budget, your lifestyle and your goals when deciding between a fixed or variable interest rate.
Low interest home loan features
A home loan's value isn't just reflected in its interest rate. There are also a host of features that can add value to a home loan and help it work for you.
Offset accounts, for instance, allow you to pay off your home loan quicker and save some serious money on interest payments. An offset account is a transaction account linked to your home loan. When your lender calculates interest on your home loan, they'll offset the amount by the total amount of the funds in the account. For instance, if you have a $500,000 home loan with $50,000 in your offset account, you'll only be charged interest on $450,000.
Redraw facilities can also be handy. A redraw facility allows you to access any additional funds that you've paid towards your home loan. You can withdraw the money for any purpose you choose, though some home loans do have a minimum redraw amount.
A split facility allows you to split your home loan into multiple accounts, taking advantage of the features from several different home loan products. For example, you could split your account into fixed and variable rate portions so that a portion of your home loan gives you the certainty of a fixed rate while another portion offers the flexibility of a variable rate.
When you're choosing a home loan, you should think about what features would suit your lifestyle and financial goals. You also need to pay attention to any fees that are charged. Some home loan features carry associated ongoing fees. This doesn't mean a home loan product is poor value. It simply means you have to weigh the cost of the features against the likelihood that you'll benefit from them.
What to avoid in a low interest rate home loan
Low interest rate home loans are often discounts lenders offer on their existing products. They can sometimes be offered as a special promotion to woo borrowers. These discounts can appear to be great, but you have to look a little closer to be certain.
Lenders will often offer what’s known as an introductory variable rate, or a honeymoon rate. This is typically a set discount off the standard variable rate for a predetermined period of time, usually one to two years. At the end of the introductory rate period, the home loan will often revert back to either the lender’s standard variable rate or an ongoing discounted variable rate.
These loans look very attractive, but it’s important to pay attention to how much you’ll pay in the long run. Have a look at the rate your home loan will revert to at the end of the introductory period. If it’s not competitive with other variable rates on offer, the home loan may not be as good a deal as advertised.
You can get an idea of the true value of a home loan by looking at the comparison rate. The comparison rate takes into account both the home loan’s interest rate and its associated fees. In the case of introductory rate home loans, it will also factor in the rate that the product will revert to at the end of the introductory period. By looking at this rate, you can get a clearer picture of how competitive the product is.
Find the low interest mortgage for you
When comparing low interest home loans, remember to take into account the features and flexibility you think you’ll need. And don’t forget to look closely at the loan’s fees to make sure it’s actually delivering good value for money.
A low interest rate home loan might not have some of the fancy features of other mortgage products. But by keeping your rate low, you could stand to save hundreds of thousands over the life of your home loan.