Home loan interest rates

How do interest rates work? 

An interest rate is a fee charged by a lender for a loan.  

To put it simply, interest is the cost of borrowing money for a home loan, car loan, credit card, or any type of loan. The rates are usually expressed as a percentage.

Borrowers can choose to repay their loans at a variable (changing month to month) rate or a fixed (consistent for a set period of time) rate. 

How are interest rates calculated?  

The interest on your home loan is calculated using this formula: (Principal x Rate) / Time  

For example, if you have a $400,000 home loan with an interest rate of 4%, your interest would be calculated as (500,000 x 0.04) / 365 = 54.79. 

Save yourself the maths and use our Home Loan Repayment calculator to work out your home loan repayments in seconds. 

How are interest rates set? 

Each month, the Reserve Bank of Australia (RBA) is responsible for setting the cash rate.  

Lenders and credit providers often use the set cash rate to create their own rates. However, lenders are free to increase or decrease their rates independent of the cash rate. 

Why do some people qualify for higher or lower interest rates? 

There are several factors that can affect why one home buyer or borrower might qualify for a high interest rate while others may qualify for a lower interest rate.  

This usually depends on whether their lender finds the borrower’s situation to be high-risk or low-risk. 

High-risk borrowers tend to have a higher interest rate, whereas low-risk borrowers are more likely to benefit from a lower interest rate. 

Some of the deciding factors include: 

• LVR (Loan to Value Ratio) 

• Income and financial commitments 

• Lifestyle and living expenses 

• Credit rating  

• Size of the deposit 

• Current loans and debt, e.g. existing mortgages, credit cards and personal loans 

• Existing assets e.g. property 

• Value of the new property 

• If the borrower is an investor or owner occupier 

• If the borrower intends to make P&I repayments or Interest Only repayments 

Why is it better to have a low interest rate home loan? 

A lower interest rate home loan will mean that you pay less interest with each monthly repayment.  

A low interest rate can save you thousands each year, and tens of thousands over the full term of your loan.  

For instance, households with a loan of $371,100 could save up to $162,458 over a 30-year loan by lowering their rate from 5.67% to 3.64%. 

If you’re unsure if you’ve got the best rate, speak to a Lendi Home Loan Specialist today. 

Is the lowest rate always the best home loan rate? 

No, the lowers rate doesn’t always necessarily mean the best home loan rate.  

You’ll need to consider the associated fees and charges that can add thousands to the cost of a loan. 

Also, depending on your situation, some restrictions and loan features may not be the best fit for your individual needs. For instance, if you want the option to make extra repayments or use an offset account you may need to choose a loan with a slightly higher interest rate than the lowest available. 

Your Home Loan Specialist can help you run the numbers to work out which option makes sense for your unique scenario. 

What are the different ways I can pay interest on my loan? 

There are three ways a borrower can pay their interest and which option you choose will be determined by your specific financial situation and future plans. 

What is the difference between a variable and fixed interest rate? 

A variable rate home loan has an interest rate that may fluctuate, depending on the financial climate and cash rate. On a fixed rate home loan, your repayments and interest rate stay the same for the fixed period (usually 1-5 years).  

Variable rate home loans are more flexible than fixed rate home loans as they allow you to make unlimited extra repayments. You may be able to make limited extra repayments on a fixed rate home loan, but only up to a certain amount.  

Variable rate home loans also allow you to have a 100% offset account and redraw facility, while fixed rate loans do not. 

On the other hand, fixed rate home loans make it easier to budget as you know how much you have to pay back each month. Your repayments could change month on month with a variable rate home loan. 

What is an interest rate vs comparison rate? 

Also known as the ‘true’ or ‘real’ rate, the comparison rate calculates the average interest rate with the addition of any other upfront or ongoing fees during the loan term.  

It is designed to help consumers compare home loans and lenders are usually required to display comparison rates next to each interest rate. 

Comparison rates operate under fixed conditions and considers a loan of $150,000 on a 25-year loan period with a principal and interest repayment method.  

Be aware that not all fees and charges are included in the comparison rate, so it's important to still check these for any loan you are considering. 

What is the Average Annual Percentage Rate (AAPR)? 

Similar to the comparison rate, the AAPR calculates the real rate of a home loan. It takes it a step further and takes into account honeymoon rates, ongoing fees and introductory offers.  

The AAPR takes your actual loan amount and calculates the rate over a 7-year period. 

Although both the AAPR and comparison rate attempt to do the same thing, which is to determine the most accurate and real rate of your mortgage, the AAPR is seen to be a more accurate representation.  

Since a vast majority of loans used today exceed $150,000, comparison rates are used as more of a guide for determining the cost of your loan in the long run.  

The AAPR doesn’t include government fees and service fees such as redraw, since most of them are usually free.  

However, the AAPR could be considered as a more accurate reflection of your overall loan rate over its term. 

How can I negotiate to get a lower interest rate on my mortgage? 

If you’d like to negotiate a lower interest rate, you can either get in contact with your lender or get free help from a Home Loan Specialist to negotiate your interest rate or home loan terms.  

A few tips to increase your chances of a successful negotiation include: 

• Ensure you are an ideal borrower 

• Have a low LVR (80% or lower) 

• Have a good credit score 

• Ensure you make your repayments on time 

• Ensure you have steady employment 

Keep the current financial climate in mind, as this will also impact your ability to refinance. 

Read our guide to: How to negotiate a lower interest rate on your home loan. 

How do I choose a home loan? 

Traditionally, choosing a home loan was a cumbersome process. You would need to review all home loan credit products available, assess the terms and conditions as well as the individual rates and product information. 

Nowadays, you can skip the hassle of searching through hundreds of home loans by finding a home loan online.  

All you need to do is tell us a bit about yourself, your needs and preferences and our technology will match you with the right loan for your situation.  

Once you’ve chosen your loan, we’ll do the hard work of submitting your application and guiding your loan to settlement.  

Plus, our experts are on-hand every step of the way to answer your questions and offer guidance. 

Got a home loan question? 

We've got answers! Choose a time to chat with a Home Loan Specialist and get free expert guidance.