How to get the best home loan interest rate

• Find out how big the difference can be with a lower interest rate.
• How to get the lowest possible interest rate on a home loan.

The home loan interest rate you get is a result of many factors. However, you should always be seeking the lowest rate available, providing all other features of the loan to which it is attached are acceptable.

There are several fees associated with a home loan, and you should pay attention to all of them. However, interest is a cost incurred over the entire length of the loan term. This makes it a significant cost associated with borrowing money. Getting a lower rate can be worth paying the fee for.

Read on to find out how to minimise it, even if you’ve already taken out a loan.

What is a home loan interest rate?

This is the amount of money the loan provider charges you for advancing credit. The interest rate is a percentage of the loan's original amount (the principal).

Interest is the main way in which the lender earns money. Since the lender could have potentially used that money for other purposes, they need to be compensated over the duration of the loan.

There are several types of interest rates associated with home loans:

• Fixed interest rate. This interest rate does not change during a specific period of the loan (usually the first five years). After this time, the interest rate may vary.
• Variable interest rate. This interest rate changes as the market does, usually in line with the Reserve Bank cash rate. It may increase, but it may also decrease.
• Partially-fixed rate (also known as a split loan). This is a combination of the previous two interest rate types. You get to decide the ratio in which the loan is split between fixed and variable interest rates.
• Comparison rate. The three rates mentioned above are the rates advertised by the lender. But lenders are also obliged to publish a comparison rate, a notional rate that factors in the cost of other unavoidable loan fees charged by the lender. Note that this rate is not the same as the interest rate.

What is the average interest rate for a home loan?

The average interest rate for a fixed interest rate home loan is different from that of a variable interest rate loan. A variable rate may change each year and even fluctuate during the year.

At the time of writing, the average variable mortgage interest rate is around 3% p.a. The Reserve Bank publishes updated figures each month.

Knowing the average interest rate is helpful because you should be aiming for something below this value.

How much difference can a low interest rate make?

A small change in the interest rate of your home loan can make a big difference over the life of your loan.

The lifetime of a home loan can span two, possibly three decades. Paying interest on your loan principal monthly can add up significantly over this time. Even a small decrease in the interest rate you pay could save you tens of thousands, depending on your loan size and term.

Let’s compare two loans for the purpose of illustration.

• Loan A has monthly repayments of $1,264.81. This adds up to total repayments of $455,331.60. The total interest paid over the lifetime of the loan is therefore $155,331.60.
• Loan B has monthly repayments of $1,108.86. This adds up to total repayments of $399,189.60. The total interest paid over the lifetime of the loan is therefore $99,189.60.

A difference of 1% saves the borrower $56,142 over the lifetime of the loan. It is worth mentioning that a 1% decrease is significant, but even a change of 0.25% can make a considerable difference.

How can I get the best home loan interest rate?

It depends on your current situation.

Applying for a loan

If you are in the process of picking a lender, you can make comparisons online. Many sites will have a matrix allowing you to compare lenders head to head. You can compare interest rates, other fees and loan features, as well as the term of the loan.

Already have a loan

If you have already taken out a loan, you can ask your lender for a better rate. If you have made prompt repayments and have a good track record, you may be in a great position to negotiate. Your lender will probably want to retain you as a client and may reduce your interest rate.

You should be prepared before speaking to your lender. Research the rates offered by competing lenders and mention this when you negotiate. If your lender is also now offering new clients a lower rate (due to market changes etc.), mention this and ask if you’re eligible for the same.

If the negotiations don’t go as planned, that earlier research will come in handy. You can refinance your loan and choose one of the competing lenders that have better rates. You do need to account for the fees associated with refinancing, such as early exit fees and new loan application fees. Be sure to calculate the total costs you would incur and whether or not you’d still be saving money.

Benefits of a mortgage broker

Sometimes consulting an expert can get you the best results. A competent mortgage broker may be able to get you a better interest rate (as well as other loan features). Mortgage brokers will have expert knowledge regarding most lenders, some of which you’ve never even heard of.

Mortgage brokers can help you select the lender that suits your needs best. They will also have access to the lenders that communicate with brokers only. Additionally, if they have a large enough client base, the volume of business will allow for special rates. Be sure to do your research and find a reputable mortgage broker if you decide to enlist one.

The verdict

It is worthwhile putting in the time and effort when shopping for a loan or refinancing one. If you already have a loan, taking the step of negotiating your current rate could save you thousands. This is true even if you’re already 10 years into your current loan.

Take the initiative to get the best out of your home loan today. Your future self will thank you.