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Buying a home

A simple guide to home loan interest rates

13 September 2021

When you’re in the market for a home loan you’ll see all sorts of interest rates, including comparison, fixed and variable. It’s important to understand what these terms mean when you’re thinking about what loan is right for you. Fortunately, it’s much simpler than it may first appear. 

Interest rate basics

Put simply, a home loan interest rate affects how much interest is charged to your home loan over one year. It’s shown as a percentage and applies to the outstanding amount of your loan (excluding any offset amounts).

While lenders like banks set their own home loan interest rates, in Australia these are often impacted by movements of the official cash rate set by the Reserve Bank of Australia. Over time, home loan interest rates go up and down based on economic trends like inflation and growth. Of course, rates you see advertised can also vary. Banks will offer different rates for different types of home loans and different levels of lending risk.

Interest rates vs comparison rates

The interest rate isn’t the only cost borrowers pay – most lenders also charge fees. That’s why it’s important to keep your eye on a loan’s comparison rate when shopping for the best deal.

There are clear rules for how lenders calculate their loans’ comparison rates. This ensures they provide more of an “apples to apples” comparison.

Comparison rates can make it easier to understand your home loan as they include relevant cost factors along with the interest rate. These factors can include:

  • the interest rate
  • most fees and charges
  • repayment frequency
  • loan term
  • the amount of the loan.

Comparison rates are still represented as a percentage but provide a clearer way for you to work out the true cost of a home loan over time.

What to look out for in a comparison rate

When you’re looking at comparison rates, know that comparing them isn’t always easy. A comparison rate only applies to the specific example loan given, won’t include all loan-related costs or benefits, and they may not reflect how you plan on using your loan.

To get a better sense of what a comparison rate involves, take a look at the related “comparison rate warning”. Lenders use these to help give you a better idea of how a comparison rate is calculated. For example, different amounts and terms will result in different comparison rates. Likewise, costs such as redraw fees or early repayment fees and cost savings such as fee waivers also won’t be included but may influence the cost of the loan.

So while comparison rates can give you a simple way to compare loans, think of them more as guide than gospel. Before making any decisions, be sure to talk to a lender about what type of loan is likely to offer the best value based on your circumstances.

Fixed vs variable interest rates

When shopping for a home loan, you’ll usually have the option to choose between fixed and variable rate options. Sometimes you can split your borrowing across both options. Getting to know what fixed and variable options mean can help you make a more informed – and confident – decision about what’s right for you.

Fixed rates

A fixed rate loan gives you the certainty of a fixed interest rate and minimum repayment amounts for a set amount of time. Banks typically offer fixed rates for terms between one and five years. When the fixed period ends, your loan switches to a variable rate (though you may be able to negotiate another fixed rate period).

There are often more limited features available during a fixed rate period, such as no ability to offset and restrictions on making extra repayments. But depending on your circumstances, being able to lock in a good rate for a couple of years might be more important to you.

If interest rates fall, don’t automatically jump ship to take advantage of lower rates. Fixed rate loans usually have break fees, so paying off a fixed rate loan early means you’ll likely have to pay an early exit fee – which may be substantial.

Variable rates

A variable interest rate can move up or down over the course of your home loan’s term. These changes are usually reflected in your repayments, which can make long-term budgeting with a variable rate loan more unpredictable than a loan with a fixed rate interest period.

Variable rate home loans can also provide more flexibility than fixed rate loans through added benefits like optional offset, unlimited additional repayments and the ability to apply to redraw extra repayments you’ve made, which is known as Home Loan Cashback at Suncorp Bank.

When it comes to interest rates, a little help can go a long way

If you’re looking to learn more about what type of home loan rates and features could be right for you, get in touch. Our home lending experts can help you understand your options and all consultations are 100% obligation-free.

Talk to a home lending specialist

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Information is intended to be of a general nature only and any advice has been prepared without taking into account any person's particular objectives, financial situation or needs. Home Loans are provided by Suncorp-Metway Ltd ABN 66 010 831 722 AFSL No. 229882 Australian Credit Licence 229882 (“Suncorp Bank”) to approved applicants only. Fees, charges, terms and conditions apply and are available on request.