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Buying a property is a significant decision for many Australians. Understanding how home loan interest rates are calculated and selecting the most appropriate loan for your lifestyle and objectives can make all the difference.
This guide on home loan interest rates can help you navigate your home-buying journey with confidence.
Home loan options
Asides from interest rate movements, home loan interest rates vary largely based on the type of loan you require and your loan to value ratio (LVR), and your personal situation. Let’s explore your needs.
I'm looking to refinance
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I'm looking to purchase
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I want to buy an invesment property
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What is interest?
Home loan repayments are made up of two major parts:
principal repayments and interest repayments. Of these, the principal repayments refer to repayments made on the overall loan balance, i.e. the amount of money borrowed.
Interest repayments are calculated based on the size of the loan, the interest rate attached to it and the repayment frequency. In layman’s terms, interest is the monetary fee charged by the lender for borrowing money and is usually denoted as an annual percentage rate (APR).
Home Loan Repayments:
Accelerate with Fortnightly, Weekly and Extra Repayments
It’s a common mistake to underestimate the impact of making fortnightly or weekly home loan repayments instead of monthly repayments. By making fortnightly repayments, you make the equivalent of an extra month’s repayment each year, as there are 26 fortnights in a year. This can help you accelerate your goal of home ownership without a mortgage by paying off your home loan sooner and, importantly, saving you thousands in interest over the life of the loan.
Remember, when it comes to home loan debt, repaying it more frequently can help reduce the interest costs. When making weekly instead of fortnightly payments, the principal amount is reduced further by comparison and, as a result – the interest charged.
As there are 52 or 53 weeks a year, weekly repayments may result in either 52 or 53 payments annually. This difference in the number of weekly repayments over fortnightly repayments compared to making monthly repayments is less and hence the savings impact is less.
Head over to our home loan repayment calculator for an easily digestible breakdown of your repayments and to work out the savings you can make.
Aside from making more regular repayments, such as fortnightly repayments, you may make additional payments above your minimum total monthly requirements. These extra repayments can greatly affect how quickly you fully repay your home loan. Always check the terms and conditions of your loan prior to making additional payments.
How does an offset account work?
An offset account is a valuable home loan feature designed to reduce the amount you pay overall in repayments. It’s a type of transaction account linked to your home loan. As interest repayments are calculated based on the size of the loan, money held in your offset account is ‘offset’ against the outstanding principal home loan balance, saving you on interest payments. Where a lender offers the ability to hold multiple offset accounts against a single home loan, the money held in the multiple offset accounts is totalled, and the combined value of the funds is offset against the loan.
Head over to offset account calculator to explore how much you can save with this valuable feature and for more information about how it works.
What is a home loan
comparison rate?
A home loan comparison rate should be stated alongside a lender’s advertised interest rate. Comparison rates serve as a standardised measure to help you to compare different loan products offered by different lending institutions to help you understand the true cost and value of a home loan. The comparison rate is an accumulation of the interest rate, as well as other fees and charges relevant to a certain loan.
The formula for calculating comparison rates is regulated and provided by the Consumer Credit Code and all Australian financial institutions and mortgage providers are required by law to use this same formula.
Do keep in mind, comparison rates do not always provide the full picture. Government charges such as stamp duty or title registration fees, as well as fees and waivers associated with loan options such as government charges and title search fees.
That’s why it’s best to not solely rely on the comparison rates. Though it can help you to filter through your options, always be sure to do some research into the terms and conditions before signing up.
If you want peace of mind while researching different loan products, be sure to make use of our comparison rate calculator to help you get started.
Variable vs fixed rate:
what is the difference?
Variable rate home loan
Refers to a mortgage where the interest you are charged on the overall balance fluctuates based on market conditions. These market values are generally driven by the Reserve Bank of Australia, the Bank Bill Swap Rates (BBSW) and overall business costs, albeit there are other underlying variables that may influence the interest rate on your loan.
Fixed-rate home loan
Refers to a mortgage where the interest rate remains stable and constant, either for the entire duration of the loan or more likely, a fixed rate period specified when signing the contract.
What is Loan to value ratio (LVR)?
Loan to value ratio (LVR) is a metric used by lending institutions to measure the amount you need to borrow to buy a specific property. It is calculated as the overall home loan amount expressed as a percentage of the overall property value and it is an early indicator of your borrowing power.
How is LVR calculated?
For example, let’s say you have a $200,000 deposit for a house worth $950,000. Then you would have to borrow $750,000 through a home loan.
This means your LVR = $750,000/$950,000 = 75%
That’s why typically, a lower LVR can be deemed to be less risky by lenders and at times, and can assist you to qualify you for better offers.
With, as most property investors choose to take on as much debt as possible, lowering your LVR as much as possible may not always be in your best interest. It is recommended to seek financial advice when investing in property.
Do note, however, an LVR of more than 80% will usually incur lenders mortgage insurance (LMI) premiums and higher rates.
LMI is in place to protect and insure the lender in the case you default on your home loan. The higher your LVR, the more costly your LMI premiums.
Investment and owner-occupied
An owner occupier home loan, as the name suggests, is intended for someone looking to purchase a residential property for themselves to live in. An investment home loan is for property investors looking to purchase an investment property. The main difference being investment loans generally tend to have higher interest rates and stricter lending criteria since lenders consider them a higher risk.
Home loan tools and calculators
Homestar Finance has a range of home loan tools and calculators that can help you get a better idea of principal and interest repayments, as well as any potential features you could be making use of such as additional repayments or an offset account.
Moreover, we offer similarly extensive guides for first home buyers and refinancers alike, to help you make the most of your next loan.
Need help understanding your home loan options?
Contact our friendly team or fill in this form and we’ll get back to you pronto.
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Great customer service and competitive rates
Amazing service from the retention team, they were very efficient, fair and straight to the point. From the moment I first contacted them, to the last step of getting my rate updates in the system, everything was done and dusted within 10 days. I had a lot of queries, so I’m sure they would have done it in less than a week! Read more
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Great Experience, thanks Homestar! Edy and the rest of the homestar team made it very easy. He kept us informed during the whole process and was very professional and answered all our questions along the way. We have used them for 6 years with our previous property so they are consistent. I would highly recommend them. Read more
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Our disclaimers
1 Rates shown apply to new eligible Owner Occupieda or Investment home loansb only, loan limits may apply depending on your product (refer to the product page) and at least one applicant is on PAYG employment. For fixed rate loans, after the fixed rate term, a variable rate will apply. Rates are subject to change without notice. Existing borrowers may have different interest rates which are dependent on the rate offered to the borrower at the date when a home loan settled and any reductions or increases the lender decided to make on the existing loan over time. Accordingly, there is not one standard variable rate that applies to all Homestar home loans and existing customers can confirm their current rate(s) by logging in to internet banking or by contacting customer service. Terms, conditions, and eligibility criteria apply.
2 Comparison rates are based on a basic Homestar loan, on a $150,000 loan amount over 25 years. WARNING: This comparison rate is true only for the examples given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.
3 Third party cost(s) incurred by service provider(s) are payable and may vary or increase depending on the service provider, nature of the service and request. Any additional cost(s) are passed on directly to the applicants(s). If there is a variation or an increase, a separate quote will be provided..
4 Disbursements may also be payable.
Other fees and charges may apply.
DISCLAIMER: Terms, conditions and eligibility criteria apply to all our loan products and features. Fees, charges and disbursements are payable. Final approval is subject to credit assessment. Information valid as at 21st April 2024 which is subject to change without notice. Please consider if the product is appropriate for your individual circumstances. If you need assistance or have any questions about a product or feature and its suitability, please contact our Loan Specialists.
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