What are home loan interest rates?
- Yuan Gao
- Feb 24, 2024
- 2 min read
If you’re a first homebuyer, you should understand what interest rates are and how they work.
Interest rates attract plenty of attention from home buyers, sellers, lenders and anyone else watching the home loan market. That’s because they play a key part in determining the cost of your home loan and repayments.
Interest rates are the fees charged for borrowing money from a lender. It's expressed as a percentage of the amount borrowed. You can use FND's Mortgage Repayments Calculator to get a better idea of the cost of interest. Or, you can read on to find out how interest rates are determined and how to compare them.
What is a cash rate?
One factor that shapes home loan interest rates is the ‘official cash rate’, which is the interest rate set by the Reserve Bank of Australia (RBA) for financial institutions to borrow funds from each other.
It’s a good idea to keep up to date with cash rate decisions made by the RBA — they review it every month (except January) and any change in the cash rate may flow through to your home loan interest rate, especially if it has a variable rate.
What affects interest rates?
As we’ve seen, the RBA sets the cash rate and this influences home loan interest rates. Lenders set their own interest rates, so a variety of other factors can also affect the rate you pay.
Your personal situation could also impact on your home loan rate. As a guide, how much you borrow as a percentage of your home’s value (also known as the ‘Loan to Value Ratio’) can influence the rate you pay. Saving up a large deposit will lower your LVR and can increase your bargaining power to negotiate for a lower interest rate.
What is a comparison rate?
When you’re comparing interest rates advertised by different lenders, it’s important to consider their comparison rate. By law, this must be displayed alongside the headline rate. The comparison rate is designed to help you, compare rates more reliably.
The comparison rate takes into account most (but not all) fees and charges associated with a loan to give you a better idea of the true cost of the loan.
The comparison rate also makes it easier to more accurately compare different loans. A home loan with a very low rate, but high fees, could turn out to be more expensive than a loan with a higher rate but zero fees.
How do I compare interest rates?
The comparison rate can give you a better idea of the real cost of a home loan. But be careful not to get caught up in focusing solely on rates. Home loans can offer a variety of features which are worth considering — like an offset account or redraw facility. One feature may be particularly important to you, but it could be associated with a higher interest rate than a more basic home loan.
The bottom line is that a loan may seem attractive based on its rate, but it may not be right for your home loan needs. If you need a hand in working out what your priorities are, your local FND Broker can help you compare rates and features from thousands of home loans from our panel of over 50 leading lenders^.
