How to find the cheapest home loan

ALASDAIR DUNCAN
Whether you’re in the market for your first home, refinancing, or even looking to purchase an investment property for your financial future, getting the cheapest home loan could appeal. So, how can you save money on your home loan interest rate?

If you’re seeking out a cheap home loan, you may have questions, such as what lenders offer the best deals, what features to look for, and even whether it’s better to go for a fixed or variable rate loan, or a combination of the two. In this article, we share:

Which lenders offer the cheapest home loan rates?

Interest rates are only one part of a cheap home loan – it is also important to consider factors such as the term of the loan, its features, and any fees and charges attached. It is also important to keep in mind that when it comes to home loans, finding the cheapest on the market ought not necessarily be the only consideration – it is important to seek out a home loan with features that suit you and your particular needs and circumstances.

To help Aussies find a good deal on home loans, Canstar gives out an annual Home Loan Award to outstanding providers, with the winners assessed based on price (interest rates and fees) as well as the features they offer. You can visit our Home Loan Awards page to see how much interest you could save with one of our current Award-winning providers.


Compare Home Loans with Canstar

If you’re currently considering a home loan, the comparison table below displays some of the variable rate home loans on our database with links to lenders’ websites that are available for first home buyers. This table is sorted by Star Rating (highest to lowest), followed by comparison rate (lowest-highest). Products shown are principal and interest home loans available for a loan amount of $350,000 in NSW with an LVR of 80% of the property value. Before committing to a particular home loan product, check upfront with your lender and read the applicable loan documentation to confirm whether the terms of the loan meet your needs and repayment capacity. Use Canstar’s home loans comparison selector to view a wider range of home loan products. Canstar may earn a fee for referrals.

*Comparison rate based on loan amount of $150,000 and a term of 25 years. Read the Comparison Rate Warning


Why are home loan rates cheap right now?

In recent times, the Reserve Bank of Australia (RBA) has cut the cash rate to record lows, partly in an effort to help with our ongoing economic recovery from the COVID-19 pandemic. Banks and home loan lenders have in turn cut their rates, hoping to encourage new home buyers, refinancers and investors to take out home loans.

This means many prospective home buyers and refinancers have access to lower interest rates than ever before, which in turn could mean you’ve got a a better chance to find a cheap home loan.

What goes into a cheap home loan?

When comparing home loans, it is important to consider features such as the interest rate, whether the loan is fixed or variable, the fees and charges attached, the features of the loan itself, the repayment frequency and the term of the loan.

Interest rate

The higher the interest rate on a loan, the more expensive it will be to pay back. While rates in Australia are currently at record lows, there are factors that can influence the interest rate you’re charged, and different kinds of rate that you can choose from.

If you’re in the market for a home loan and looking for a cheap rate, you can start by comparing interest rates with Canstar.

Fees and charges

Home loans typically come with fees and charges attached, and these can come in the form of both establishment and ongoing fees. These will vary depending on the lender, but the comparison rate of a home loan is designed to represent the total cost of a loan, taking into account interest rates as well as fees and charges.

If you’re in the market for a cheap home loan, you could weigh up various lenders using Canstar’s Home Loan Comparison Rate Calculator.

Features of the loan

There are a variety of features that can come bundled up with a home loan, and while it’s not always the case, it’s often possible that the more features a loan has, the more expensive it might be in terms of fees and charges. Features of a loan can include an offset account, a redraw facility and even bundled credit cards.

It is worth keeping in mind that some loans such as variable rate loans have features that can allow you to pay off your home loan more quickly, which could save you money in the long term. If you’re curious about how much the features of a loan might cost you, you can try Canstar’s Home Loan Comparison Rate Calculator.

Repayment term

Home loans are paid off over a period of time, and this period is agreed upon by you and your lender. While a 25–30 year term might be standard, some lenders offer longer terms of up to 40 years. It is worth keeping in mind that a longer loan term can mean lower repayments incrementally, but over time, the interest you pay can add up and become expensive.

Loan-to-value ratio

Loan-to-value ratio (LVR) is a calculation that lenders use to express the size of a home loan as a percentage of the value of a property. If you pay a 20% deposit, for example, then the LVR of your home loan would be 80%. This figure is important because, if you have a deposit of less than 20% of the purchase price of the property you wish to buy, it’s likely you’ll be charged lenders mortgage insurance (LMI). However, you might be eligible for an LMI discount. Some first home buyers can also avoid paying LMI.

LMI can add tens of thousands of dollars to the cost over the life of a home loan. What this generally means is the more deposit you have saved, the cheaper your home loan could ultimately be, because in addition to borrowing less, you could avoid LMI.

There are certain schemes for first home buyers to assist people in getting on the property ladder with low or no deposit. Keep in mind that if you are considering taking out a home loan with a low or no deposit, you could be at greater risk of going into negative equity if you have a high loan-to-value ratio. It could be a good idea to seek professional financial advice to support your decision making.

Does locking in a fixed rate make your home loan cheaper?

When you take out a home loan, you can opt for a fixed interest rate, meaning the interest you pay will stay the same over the life of the loan, or a variable interest rate, which can go up or down with the cash rate. You can also opt for a split loan that combines the two. Locking in a fixed rate may or may not make your home loan cheaper. Moneysmart says that pros of a fixed rate include that it makes budgeting easier and you could save money by having fewer loan features, but you should weigh this up against missing out on potential savings if interest rates go down. Also, it may cost you more if you fix your interest rate then decide to switch loans later, as a break fee might apply.

Does your credit score affect your ability to get a cheap home loan?

Your credit score is a number that represents how trustworthy you may be as a borrower. There is no strict credit score requirement for a home loan, but generally speaking, if your score is higher, lenders may be willing to lend you more money at more favourable interest rates.

A history of regular repayments of your bills might lead to a higher credit score, while a history of defaults and late payments might lead to a lower one. If your credit score is not as high as you would like it to be, Canstar has tips to improve it.

If you’re wondering where to start when looking for a home loan deal, you can compare home loans right now with Canstar. We have over 4,000 home loan rates from more than 100 different lenders on our database, so whether you’re looking for a first home, investing or refinancing, we may be able to  help you find a suitable home loan.

 

Cover image source: G-Stock Studio/Shutterstock.com


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