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After you successfully apply for a home loan, you will need to repay your bank or other lender over a period of years, and mortgage rates will have an impact on the size of your repayments.

So how do mortgage rates work, and what do you need to know about them? Here, we’ll answer questions you may have, such as:

  • What is a mortgage rate?
  • What is a fixed rate home loan?
  • What is a variable rate home loan?
  • How are mortgage rates decided?
  • What is a comparison rate?

What is a mortgage rate?

A mortgage rate, otherwise known as an interest rate, is a percentage of your loan that a bank or other home loan lender will charge for lending you money. Loans are typically made up of two main components: the principal, which is the amount that you borrow, and the interest, which is the amount that you pay on top of it. The interest component of this is the mortgage rate. Generally speaking, there are two types of interest rates attached to home loans in Australia, either fixed or variable.

What is a variable rate home loan?  

A variable rate home loan is one in which the interest rate can go up or down as the lender chooses, depending on factors such as the economic climate and the rate set by the Reserve Bank of Australia (RBA). This means that over the term of the loan, you can end up paying more or less interest, depending on whether your lender moves the cash rate up or down.

Variable rate home loans tend to be more flexible than fixed rate ones, and can include features such as redraw facilities, offset accounts, and the ability to make additional repayments.

What is a fixed rate home loan?

A fixed rate home loan is one in which the interest rate is literally ‘fixed’ or set in place for a set period, meaning that it will not go up or down over time. This means that over the fixed term of the loan, typically a period between one and five years, your repayments will remain the same, regardless of whether interest rates go up or down. The home loan will then revert to variable for the rest of the time you have it.

A fixed rate loan may be desirable if you want certainty, as your payments will not go up or down. In some cases, fixed rate loans may also have cheaper mortgage rates than variable ones for the initial fixed term. However, fixed rate loans typically have fewer features than their variable rate counterparts. You will typically face a cost penalty if you sell your home or refinance early with a fixed rate loan, and you will usually not be allowed to make additional monthly repayments.

A variable rate loan can be combined with a fixed one into a split loan, which can allow a borrower to have the flexibility and features of a variable rate along with the certainty of a fixed one.

How are mortgage rates decided?

Banks and other lenders set mortgage rates partially based on the decisions of the RBA. Every month except January, the board of the RBA meets and decides whether to raise or lower Australia’s official cash rate, or keep it set where it is. This decision affects how much it costs banks and other lenders to do business, including providing home loans.

Banks and other lenders are not required to follow the decisions of the RBA, and are free to raise or discount certain rates as they choose. However, most of them will still tend to increase or decrease their mortgage rates in line with what the Reserve Bank does. .

What is a comparison rate? 

The term comparison rate refers to a special type of mortgage rate designed to give borrowers a fuller picture of the total cost of a loan. It takes into account the principal of the loan and the interest rate, as well as most additional fees and charges. Lenders are legally required to show prospective borrowers the comparison rate of a loan along with the interest rate, to help reflect the true cost of the loan. It can be the case that two loans with very similar interest rates can cost different amounts thanks to fees and charges, and the comparison rate of a loan should reflect this.

How do you compare mortgage rates? 

If you’re in the market for a property, whether you’re looking for a first home, refinancing or even seeking an investment property, you can start by comparing home loans with Canstar. You can compare more than 4,000 fixed and variable loans, based on such factors as the loan amount, purpose, loan to value ratio (LVR) and features, such as offset accounts, redraw facilities, split loan options and more.

How do lenders assess you for a home loan?

When you apply for a home loan, lenders will typically try to get a picture of you and your financial circumstances by asking about such things as your income, how much money you have saved and any assets, debts and liabilities you might have. Canstar has a guide to the things home loan lenders look for in an application to get you started. In addition to this, Canstar has a more general guide to how to apply for a home loan and how to apply for home loan pre-approval, if you wish to know exactly how much a lender will be willing to loan you.

 Last updated: 22/09/2021

Author: Nina Tovey

As Canstar’s Editor-in-Chief, Nina heads up a team of talented journalists committed to helping empower consumers to take greater control of their finances. Previously Nina founded her own agency where she provided content and communications support to clients around Australia for eight years. She also spent four years as the PR Manager for American Express Australia, and has worked at a Brisbane communications agency where she supported dozens of clients, including Sunsuper and Suncorp.

Nina has ghostwritten dozens of opinion pieces for publications including The Australian and has been interviewed on finance topics by the Herald Sun and the Sydney Morning Herald. When she’s not dreaming up ways to put a fresh spin on finance, she’s taking her own advice by trying to pay her house off as quickly as possible and raising two money-savvy kids.

Nina has a Bachelor of Journalism and a Bachelor of Arts with a double major in English Literature from the University of Queensland. She’s also an experienced presenter, and has hosted numerous events and YouTube series.

You can follow her on Instagram or Twitter, or Canstar on Facebook.

You can also read more about Canstar’s editorial team and our robust fact-checking process.

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